Apple Q3 2024 earnings call: Services and Apple Intelligence lead the way

Apple, the largest company in the world by market capitalisation, is popular for its products like the iPhone, Mac, and iPad. Besides hardware, it has built an ecosystem of software, subscription services, and digital content, solidifying its position as one of the leading tech companies in the world. Apple just announced its Q3 2024 results, with services revenue and Apple Intelligence drawing significant attention from analysts.

Revenue increased 4.9% year-on-year to US$85.8 billion in Q3 2024, which is above expectations. The revenue growth was primarily driven by a double-digit increase in the services segment, despite a 230-basis point negative impact from foreign exchange fluctuations.

Net income rose by 7.9%, with earnings per share up by 11.1%, as Apple repurchased 139 million shares from the open market for US$26 billion. The company also declared a cash dividend of US$0.25 per share for the quarter. Revenue in the upcoming quarter is expected to grow at a similar pace.

Gross profit margin declined from 46.6% in Q2 2024 to 46.3% in Q3 2024, but remains within the company’s guidance range of 45.5% to 46.5%. The drop was primarily due to a different product mix but was partially offset by cost savings and an increase in services revenue, which typically carries a higher gross profit margin. On a year-on-year basis, gross profit margin improved from 44.5% to 46.3% in Q3 2024. Despite higher memory prices, the overall margin is expected to remain within the company’s past guidance range.

Foreign exchange rates, which are beyond management’s control, can impact Apple’s gross margins, particularly when the U.S. dollar strengthens. To mitigate this, the management hedges its exposure outside of the U.S. While the impact of foreign exchange on margins is incremental, it is minimal, potentially reducing revenue by 1.5% year-on-year.

Products gross margin decreased from 36.6% from Q2 2024 to 35.3% in Q3 2024 because of a different product mix and was partially offset by favourable costs. Services gross margin reduced from 74.6% to 74.0% over the same period. Overall, CFO Luca Maestri is satisfied with the company’s margins.

Products 

Products revenue increased 1.6% year-over-year to US$61.6 billion in Q3 2024, driven by the launch of the new iPad Pro and iPad Air. The user base for all Apple active devices reached all-time highs globally as new Apple users grew. Overall, Apple’s products reported high customer satisfaction and strong stickiness, which bodes well for the strength and growth of the Apple user ecosystem.

Revenue from iPhone decreased 0.9% year-over-year to US$39.3 billion (grew in constant currency), despite quarter records across several countries. According to a survey from Kantar, iPhone was the top selling model in several developed countries.

Mac revenue increased 2.5% from a year ago to US$7.0 billion during the quarter because of higher demand for MacBook Air. Sales were strong in emerging markets with June quarter records for Mac in Latin America, India, and South Asia.

iPad sales did the best among all Apple products in Q3 2024. Its revenue increased 23.7% year-over-year to US$7.2 billion because of strong demand for the new iPad Pro and iPad Air.

In the Wearables, Home, and Accessories segment, revenue declined by 2.3% to US$8.1 billion. This segment had a challenging compare as it performed well in the same quarter last year, buoyed by the launches of the AirPods Pro second generation, the Watch SE, and the first Watch Ultra. Over the trailing 12 months, revenue from this segment has grown significantly, more than doubling compared to five years ago. Apple has also expanded the availability of Apple Vision Pro to more countries, though it remains uncertain how well it will sell given its hefty price tag, and more time is needed for the market to mature.

Services

Apple’s Services revenue, which includes income from advertising, cloud, and payment services, surged by 14.1% year-on-year to a record US$24.2 billion. Both active and paying customers reached new highs, with the number of paid subscriptions surpassing 1 billion—more than double the figure from four years ago. Paid accounts and subscriptions grew at double-digit rates during the quarter, likely leading to an improvement in average revenue per user. The expanding customer base across both developed and emerging markets is driving the segment’s double-digit growth outlook for Q4 2024.

The company plans to regularly release new series and movies on Apple TV+ and introduce new games on Apple Arcade to engage both users and gamers. During the quarter, the Tap to Pay on iPhone feature was rolled out to additional markets, including Japan, Canada, Italy, and Germany, further enhancing the stickiness of the Apple ecosystem. The subscription business, though relatively new, has become a significant growth driver for Apple.

Key analyst questions

Apple Intelligence has been rolled out to developers and will be integrated into most daily apps, with a phased launch to users under iOS 18. Specific system and silicon requirements are necessary to run Apple Intelligence, which will be available on the iPhone 15 Pro, Pro Max, and their successors. This move is designed to entice users to purchase Apple’s high-end models.

Analysts had numerous questions about Apple Intelligence, which is viewed as a key growth driver for the company. CEO Tim Cook described the feature as a significant revenue catalyst and ‘another reason for a compelling upgrade.’ Given that this feature may involve privacy and regulatory considerations, Apple is actively engaging with regulators in various countries to expedite its roll-out. Additionally, the integration of ChatGPT by year-end is expected to enhance the capabilities of iPhone, Mac, and iPad, providing users with access to a vast knowledge base. However, Cook remained tight-lipped about Apple’s monetization model with OpenAI.

The launch of this feature will be accompanied by increased research and development expenses in AI and machine learning, as well as higher capital expenditures year after year. Some of these capital expenditures are being funded through partnerships, allowing Apple to manage costs by paying incrementally as projects progress.

In terms of revenue by region, Apple posted June quarter revenue records in the Americas, Europe, and rest of Asia Pacific. A few analysts were keen to know more about Apple’s performance in greater China as the region accounted for close to one-fifths of its overall revenue in Q3 2024. Cook reassured analysts that close to half of the 6.5% decline in revenue from greater China (down 3% in constant currency) was due to currency fluctuations, particularly the strengthening of the U.S. dollar.

At the same time, China’s weak consumer sentiment and fierce competition dragged the quarterly revenue down. Apple also cut iPhone prices in mainland China amid slowing demand. However, there was some good news from the region. The number of installed active iPhone there reached a record high while many existing iPhone users upgraded to a newer iPhone model during the quarter. According to a survey from Kantar, iPhones were among top three models in urban China.

In Europe, Cook mentioned that discussions with the European Commission regarding Apple’s compliance with the Digital Markets Act (DMA) are still in the early stages and ongoing. Some changes have been implemented, though they have faced resistance from companies like Spotify and Epic Games. Revenue from the European Union on the App Store accounted for 7% of Apple’s total revenue.

The fifth perspective

Apple’s Q3 2024 earnings call showcased continued strength. Its services segment outperformed and delivered double-digit growth, surpassing expectations. Apple’s ability to maintain steady gross profit margins amid economic challenges underscores its pricing power and operational efficiency. While foreign exchange headwinds posed some challenges, the company’s overall financial health remains robust. With the introduction of Apple Intelligence, the company is potentially poised for further growth and innovation in the coming quarters.