Image source @ Visual China
Institute of Literary | Value
After the U.S. stock market on Thursday, Apple's earnings report was freshly released, with total Q1 revenue of $97.278 billion, up 9% year-on-year, higher than the market expectation of $93.89 billion; net profit recorded $25.01 billion, up 6% year-on-year. Of course, Apple's most terrifying indicator is the gross profit margin. The data shows that Apple's overall gross margin on Q1 was 43.7%, up 1.2 percentage points year-on-year, higher than bloomberg economists' median expectation of 43.1%.
However, Apple also has its own worries: one is the decline in hardware product production capacity caused by the supply chain crisis, and the other is the decline in revenue and profit growth - especially on the software service side.
As we all know, Apple's revenue mainly relies on hardware, but the ultra-high comprehensive gross profit margin is mainly driven by software services. Therefore, in comparison with the two, the growth bottleneck of the software side makes Apple more worried.
All kinds of data show that after more than three years of transformation, Apple has become more and more "soft" and lives more like an Internet technology company than a consumer electronics manufacturer in the traditional sense. But now, as the software services business bid farewell to the heyday of volume and price, similar transformation problems are once again in front of Apple.
This time, where will Cook lead the $2.67 trillion carrier?
Revenue and profits have doubled, the capital market or "looking down" on Apple?
After the U.S. stock market on Thursday, Apple announced its fiscal second quarter 2022 quarterly report (as of March 26, 2022, hereinafter referred to as Q1). On the earnings call, Apple executives warned that due to the impact of the supply chain crisis, the supply of many of Apple's key products may have problems, and sales are expected to fall by up to $8 billion in the second quarter.
Under the impact of this series of news, Apple's stock price took a roller coaster. First, it rose more than 3% when the earnings report was first released, turned from rising to falling after the earnings call, and the decline once expanded to more than 6%, and it fell slightly by 2% before the market on Friday.
Capital has mixed feelings for Apple, is this earnings report really bad?
Objectively not. The current complex attitude of the capital market is based on a number of mixed indicators of Apple: revenue has set a historical record, profits have maintained growth, but the year-on-year growth rate has slowed down; gross profit margins have been riding the dust, but the supply chain crisis is approaching step by step, and the revenue ceiling is close at hand...
Apple's joy: record revenue, gross profit margin ride the dust
According to the data, Apple's total revenue in Q1 was $97.278 billion, an increase of 9% year-on-year, higher than the market expectation of $93.89 billion; net profit recorded $25.01 billion, an increase of 6% year-on-year.
Looking at the detailed revenue structure, the hardware sales business is still the main cash cow, and the iPhone 13 series products launched last year are selling well. Throughout Q1, the iPhone brought Apple $50.57 billion in revenue, up 5.5% year-on-year. In addition, Mac and iPad revenue recorded 10.435 billion and 7.646 billion, respectively, which was also higher than market expectations.
(Image from Apple's earnings report)
Of course, Apple's most terrifying indicator is the gross profit margin. The data shows that Apple's overall gross margin on Q1 was 43.7%, up 1.2 percentage points year-on-year, higher than bloomberg economists' median expectation of 43.1%.
In terms of vertical comparison, Apple's gross profit margin has not increased significantly, but it has remained stable. In the previous five quarters, Apple's overall gross profit margin recorded 39.8%, 42.5%, 43.3%, 42.2% and 43.8% respectively. In horizontal comparison, Apple is still a leader in the industry, leaving competitors such as Samsung, Xiaomi, Vivo, and OPPO far behind.
In the previous fiscal year, Xiaomi's overall gross profit margin was 17.7%, and the gross profit margin of smartphone distribution was 11.9% - compared with vivo and OPPO, which are also trapped in the low-end market, Xiaomi's gross profit margin has been regarded as a leading level. Another data worth paying attention to is that after the divestiture of Glory and the sharp contraction of the mobile phone hardware business, Huawei's gross profit margin in the previous fiscal year rose by 11.6% year-on-year.
Overall, the Value Institute believes that Apple's performance in this financial report is not bad, and many indicators have met or even exceeded market expectations. The reason why the capital market does not buy it is more out of concern for the future.
Apple's worries: supply chain crisis and growth decline
This concern mainly comes from two aspects, one is the decline in hardware product production capacity caused by the supply chain crisis, and the other is the decline in revenue and profit growth rate - especially on the software service side.
On the one hand, the impact of the supply chain crisis on Apple became more and more obvious in the fourth quarter of the last fiscal year, and the capacity level of the iPhone 13 was far less than the market expected. Although known as the "master of supply chain management", Cook can not guarantee that every link will not be missed.
At present, thanks to the control of the upstream enterprises in the supply chain, Apple's A series and M series core CPU supply is not tight, and TSMC has also started to prepare goods for Apple. What really makes Apple feel the pressure is the mature process chip of core components such as display screens and wireless components, rather than advanced process chips.
According to Bloomberg, the lead time of Apple's mature process chips in the fourth quarter of last year was extended to 22 weeks, and factories in China, Vietnam and India were shut down due to the epidemic and production cuts were the main reasons. Cook has talked about supply chain issues in the previous two quarters of earnings calls, which also shows the severity of the situation.
On the other hand, the gross profit of Apple's hardware sales business has shown a downward trend, and the profit growth space of the software service business is not as large as imagined.
It should be known that in today's overall decline in the consumer electronics market and the increasingly serious supply chain crisis, Apple's performance can maintain growth, and software services are an important contributor.
The data shows that the gross profit margin of Apple's Q1 hardware business remained at 36%, a slight increase of 0.3 percentage points year-on-year, but fell by 2% month-on-month. Considering the increasingly serious supply chain crisis and the rumors of price increases in wafer foundries such as TSMC, the gross profit margin of Apple's hardware side may be difficult to break through in a short period of time.
As for the gross profit margin of the software side, Q1 recorded 72.6%, an increase of 2.5% year-on-year and a month-on-month increase of 0.2%, which is still the top level in the industry. However, it should be noted that in the same period of the previous fiscal year, Apple's software services gross margin recorded a year-on-year increase of nearly 5%, which is much higher than today. Considering the decline in gross profit margin growth rate year-on-year in the past four quarters, it is difficult not to worry.
As we all know, Apple's revenue mainly relies on hardware, but the ultra-high comprehensive gross profit margin is mainly driven by software services. Especially in the past few years, "All In Software" is Apple's primary development strategy.
Therefore, to some extent, compared with the supply chain crisis encountered by the hardware side, the growth bottleneck on the software side makes Apple more worried.
"All In Service" is no longer a one-size-fits-all
Apple's transition to software services dates back to 2019.
At this year's spring conference, Apple's new news, games, payment, TV and other content services were fully launched, and Cook informed the outside world of Apple's transformation to software services through a pure software conference.
There is no doubt that Apple has the confidence to transform. Before 2019, Apple had software services such as the App Store, Apple Pay, Apple Music, and iCloud. Coupled with the market share of iPhones and iPads at the peak, the total number of connected devices continues to rise, and the increase in software services and profit margins before the decline of the consumer electronics market, Apple's move is very timely.
The Q1 earnings report shows that the number of apple ecological active devices reached 1.8 billion, and the ARPU value increased to $10.8 from $10 in the same period last year. Stretching the timeline can also be found that since the first quarter of the previous fiscal year, the paid subscription business represented by Apple Music has brought explosive growth to Apple's revenue, and the App Store has created a horror record of $540 million in single-day revenue during New Year's Day last year.
All kinds of data show that after more than three years of transformation, Apple has become more and more "soft" and lives more like an Internet technology company than a consumer electronics manufacturer in the traditional sense.
However, as mentioned above, the profit growth of Apple's software business has slowed down, and the revenue is mainly driven by the rise of ARPU, and it has not continued the glory of volume and price. This is mainly due to two points: first, the growth of the total number of connected devices has slowed due to poor hardware sales; second, the rise of competitors has eroded Apple's market share.
A little earlier, in addition to the iPhone and Mac, Apple's other hardware products need to be backed.
According to the financial report data, Q1iPad business revenue fell 2.1% year-on-year to $7.6 billion. With the gradual flattening of the epidemic in Europe and the United States, the market stock demand has been released in advance in the previous few quarters, and the tablet market has not returned to glory. The situation of wearable devices is even more not optimistic, Q1 revenue of 8.8 billion US dollars, 12.3% year-on-year growth rate is the lowest level in the past 18 quarters, and it is also the only business in all of Apple's hardware business that has less revenue than the market expected.
The revenue of software services is, after all, based on hardware, and only the number of connected devices and single-device ARPU can maintain growth in order to ensure the two-way growth of revenue and profit. As a result, when hardware growth is frustrated, software services are hard to stand alone.
As for the latter problem, domestic competitors such as Huawei, Xiaomi, OPPO, and Vivo have caused more and more impact on Apple.
Driven by Apple, the transformation to the software service side and the creation of a complete software and hardware ecology have long become the consensus of all first-line mobile phone manufacturers.
Xiaomi, which first proposed the slogan of benchmarking Apple last year, is still far from the former in the mobile phone hardware business, but the AIoT and software service businesses have indeed already had certain competitiveness.
Xiaomi's financial report shows that the Revenue of IoT Business in the past four quarters was 18.2 billion, 20.7 billion, 20.9 billion and 25.1 billion, respectively, which was the only one of the four major business segments to achieve growth in four consecutive quarters. By the end of last year, Xiaomi's global MIUI monthly active users reached 510 million, Chinese mainland monthly active users reached 130 million, continuing to encroach on Apple's territory.
On Huawei's side, at the global analyst conference on April 26, Hu Houkun, rotating chairman, said that the number of equipment equipped with the Hongmeng system has exceeded 220 million, and the net addition of more than 100 million units in the past year is also menacing. In June last year, Ren Zhengfei called on Huawei to focus on software service businesses such as Hongmeng, which shows the degree of attention.
According to the financial report data, Apple's revenue in The Greater China region accounts for a lot of revenue. Q1, total revenue in Greater China reached US$18.34 billion, up 3.5% year-on-year. But under the siege of Huawei, Xiaomi, and the crowd, Apple's software services can not be a monopoly in the future, and no one dares to pack tickets - more importantly, Chinese mobile phone manufacturers such as Xiaomi are also expanding wildly overseas.
Apple, which has a keen sense of smell, may have realized the possibility of another transformation.
The fifth transformation, where will Apple go?
It is said that it is difficult for elephants to turn around, but as the world's most valuable company, Apple has made at least four major transformations in the past few years.
The first is to face back Jobs and return to the hardware market after Microsoft's defeat; the second is to launch the iPod and cut into the mobile hardware track; the third is the iPhone, driving the smartphone revolution; the fourth is the transformation to the software service side mentioned earlier, pursuing higher profit margins.
These transformations have not been successful, but they are crucial to Apple's survival and development.
At present, the software services business is far from the stage of decline, but it is an indisputable fact that the challenges are getting bigger and bigger. More importantly, the market outlet is also changing, and Apple can't turn a blind eye to all this. If it was the transition to software services in the golden age of the Internet, then now, Apple's strategy is also obvious: to regain its own "hard technology" weapons, self-developed chips and automatic driving.
Self-developed chips: to achieve "5G chip freedom" is just around the corner?
Achieving chip freedom has always been an important strategy for Apple, which has spent huge sums of money over the years to develop A-series and M-series chips. Now, Cook is still one link away from the dream of "software and hardware integration ecological closed loop": 5G baseband chip, which is also Apple's last technical field to be "card necked" by Qualcomm.
I believe everyone remembers that when Apple added Intel's 5G baseband chip to the purchase list in 2016, it launched a patent lawsuit because qualcomm charged too high patent fees. Since then, Apple and Qualcomm have gradually drifted apart, and intel has once surpassed Qualcomm in the baseband chips equipped with the iPhone 5G model.
But in 2019, due to the performance defects of Intel's 5G chips that Apple could not tolerate, Cook had no choice but to reconcile with Qualcomm, and the iPhone was once again "attacked" by Qualcomm's 5G baseband chip.
Now that Intel has abandoned the 5G smartphone modem business, Qualcomm is more fearless, counting money with patent rights. Apple, accustomed to having absolute control over the supply chain, cannot tolerate this going on forever.
Since 2020, Apple's chip R&D team members have expanded by thousands of people, during which they have spent $1 billion to pocket Intel's base frequency chip division, including receiving more than 2,000 R&D personnel.
After years of investment, Apple has now seen the light of day. At the beginning of February this year, a report from DigiTimes showed that Apple is expected to achieve mass production of built-in 5G modem chips in 2023, and TSMC is ready to undertake Apple's 4nm advanced process chip orders.
This time, Cook may finally not have to bow to Qualcomm anymore.
Autonomous driving: twists and turns, waiting for the dawn
Compared with the self-developed chips that are about to see the dawn, Apple's other key business, automatic driving, is much more tortuous.
According to the latest plan, Apple is now bent on skipping intelligent assisted driving and launching a fully driverless car directly without a steering wheel within four years.
If Tesla defined electric cars, what Apple wants to do now is redefine smart cars. To this end, Apple has begun to build a complete set of autonomous driving industry chain: from vehicle-grade chips to supporting software and hardware ecology, all of them are labeled as self-developed.
The Value Institute believes that Apple's seemingly radical strategy actually has its own helplessness. In the case that Tesla has long occupied the high ground of public opinion and controlled the user's consumption mind, Apple can only subvert the market competition pattern by launching a higher-order version of self-driving cars.
However, there are many car companies in the autopilot market, and whether Apple, which has been handsome for five times since entering the automotive industry, can stand out from the siege, there is also a question mark. There is only one thing that is certain: Apple does not want to continue to "soft" itself, whether it is a core or a car, it is another strategic change, and it is also a long-term battle.
Write at the end
At the end of last week, Khuram, a strategist at JPMorgan Chase & Co., the largest bank in the United States, pointed out in a research report that this week is the "most critical week" for the second quarter of the US stock market, especially for the NASDAQ, where technology stocks are gathered. On Thursday, the three major U.S. stock indexes opened higher and went higher, with the highest-gainer Nasdaq Composite closing more than 3 percent higher.
But as we all know, this week's highlight is not over - Microsoft, Meta, Alphabet (Google's parent company) have handed over their report cards, and Apple and Amazon's earnings reports will be released as scheduled after hours on Thursday. Whether the two giants will send NASDAQ a big gift package or a package of explosives has always been a topic of concern for Wall Street investment banks.
The final result is certainly not good, Amazon's performance thunderstorm, Apple issued a profit warning, and the stock prices of the two giants also fell after hours. Coupled with the fact that the US GDP annualized quarterly preliminary value and the core PCE price index are not as low as market expectations, the former is as low as -1.4%, and the outside world is inevitably a little more worried about the performance of TODAY's US stocks.
But from Apple's point of view, the past year has been accustomed to the ups and downs of stock prices, Cook's biggest worry is not the temporary rise and fall of the secondary market, but whether it can clear the fog ahead. Apple's $2.67 trillion aircraft carrier is not so easy to turn around.