Three Key Questions About Apple (NASDAQ: AAPL) Earnings in August 2023

Apple (NASDAQ: AAPL) reported earnings for its fiscal Q3 2023 after the market close on Thursday, August 3, 2023. After the earnings release, what are the questions we’re focusing on?

1. What happened with sales and what is the outlook?

Apple delivered total Q3 revenues in line with Visible Alpha consensus at $81.8 billion, driven by iPhone sales of $40 billion, which were supported by solid demand in emerging markets. Coming into earnings, several analysts were expecting iPhone sales to come in higher than the $40 billion consensus, suggesting there was probably some disappointment despite the overall in-line performance. Revenues in North America came in lower at -6% year over year.

The company noted that revenue was strong again in India. This market may begin to break away from other emerging markets as retail and product penetration increases. While India may not generate the same volume of revenues as China’s estimated $73.6 billion, it may still increase penetration significantly and make a meaningful contribution to revenue over the next few years.

iPhone net sales for Q4 are expected to be $43.3 billion, up 1.6% year over year, but declines are projected for Mac and iPad. There has been some debate about the outlook for iPhone sell-through units, with a fairly wide range of unit expectations ranging from 45 million to 55 million for Q4. New iPhones are expected to go on sale toward the end of Q4 and be more of a driver in 2024, with 235 million units expected to be sold.

China’s Outlook Improved: With questions about China’s emergence from lockdown, there has been some debate about what the region will deliver for sell-through units for the remainder of 2023. China sales in Q3 beat pre-Q expectations of $14.6 billion, coming in at $15.7 billion, over $1 billion better than expectations. In addition, the Q3 operating profit margin beat pre-Q expectations by 140 basis points, delivering an operating profit margin of 39.2%.

At the end of Q1, analysts were projecting China to deliver $71.5 billion in revenues in 2023, down -4% from 2022 levels. This number rose throughout Q2 and Q3 to a post-Q3 estimate of $73.7 billion, now flat compared to last year. For 2024, growth is expected to resume to $76 billion, up 3% from 2023.

New Question: How big can the India market become for iPhone, and at what pace?

2. How did the Services segment perform and what is next for this segment?

For Q3, Services delivered $21.2 billion in revenue, ahead of a pre-Q expected $20.8 billion and up 8% year over year, driven by iCloud and App Store. For 2023, analysts now expect $84.3 billion in Services revenues, up 8% from 2022 and up slightly from previous expectations of $83.7 billion. For 2024, analysts currently forecast Services revenue to jump 10% to $93 billion. Given Apple’s enormous installed base, there seems to be room for Services to expand its penetration.

Cloud: For 2023, AAPL is projected to generate $9 billion in Cloud sales with more bullish analysts estimating $10-12 billion. Based on color from the Q3 earnings, Cloud looks poised to continue to sustain its growth path.

Margins: Services currently generate a 71% gross margin, nearly double the 36% for the Product segment, and can shift AAPL toward higher profitability. The company’s total operating profit margin is expected to dip to 29.6% in 2023 and 2024 from 30.3% in 2022. An increase in mix toward Services would shift the gross and operating profit margins higher for the company.

New question: What could drive iCloud’s revenue beyond $10 billion in 2024?

3. What new information was revealed about the Vision Pro headset?

While CEO Tim Cook noted his excitement for Apple’s new Vision Pro, there were no new details about the outlook for the new product. Apple’s new Vision Pro is expected to come out in early 2024. Given the high $3499 price point initially, Apple will likely have to find a sweet spot for bringing the price down enough to scale.

Most analysts covering Apple have not yet added a specific line item for VR/Vision Pro. Visible Alpha has a few broker models with VR/Vision Pro estimates. According to these early estimates for Vision Pro, Apple is expected to generate anywhere from around $1-3 billion in revenues by the end of 2024 and $4-10 billion by the end of 2027, but with ASP expected either to remain sticky at $3499 or to decline below $2000 from 2024 to 2027. Unit assumptions range from 2-3 million by the end of 2027.

Given that analysts expect Apple to deliver $478 billion in total revenue by the end of 2027, the Vision Pro business seems likely to remain a small percentage of their mix. It will be interesting to see both how big this product can become and how the VR/Vision Pro business model may be able to help drive high-margin Services revenue.

New question: What is the right price to meaningfully trigger demand for Vision Pro?