Apple Q2 Earnings: Share Buybacks, China, and AI

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For the quarter ending March 30^th 2024, Apple reported net income of $23.6B, down 2.2% year-over-year, on revenues of $90.8B which were 4.3% lower over the same period. The change in revenues reflected a 14.2% increase in services revenue and a 9.5% decrease in product revenues. Of particular note, iPhone sales which accounted for about half of total revenues, were down $5.4B, or 10.5%, from the same quarter in 2023. CEO Tim Cook noted that the drop was mainly due to the year-ago quarter reflecting pent-up demand being filled after supply constraints dampened production in 2022, and that absent this factor, Apple’s total revenues would have grown. Additionally, Cook reported growth in iPhone sales in China, and although Greater China sales fell 8.1% year-over-year, there was a 4.8% acceleration compared to the previous quarter’s figure.

Investors have been closely monitoring Apple’s exposure to China given the company’s concentration in sales and manufacturing, geopolitical tensions, the region’s economic challenges, and heightened competition from local competitors. While Apple cited a Kantar survey which put iPhone as the market leader in urban China, the latest IDC survey showed Samsung usurped Apple’s spot as the global leader in smartphone sales. Additionally, while Apple is forecasting low single-digit growth next quarter, including double-digit Services and iPad growth, the company would not provide guidance for iPhone sales. This may suggest that iPhone sales will continue to face pressure. In short, while Apple’s latest financial results were better-than-expected, they are not out of the woods yet.

In addition, Wall Street has also been disappointed in the company’s lack of progress with AI relative to its Big Tech peers. During the call, management said they are “very bullish” about generative AI opportunities and are making significant investments, which may be detailed further at Apple’s upcoming WWDC. To express confidence in their future business prospects, Apple announced a $110B share buyback program, which is $20B higher than their previous program. The increase in shareholder returns should be manageable given the company’s strong credit metrics.

Bottom line: Ultimately, Apple continues to have relatively low debt, a sizable liquidity cushion with a very low appetite for M&A, and strong free cash flow generation, which support the company’s very high credit ratings from Moody’s and S&P. These qualities help mitigate risks related to concentration and growing regulatory challenges. In the long-term, Apple may need to showcase their innovative capabilities in order to support long-term growth and product leadership.

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