Apple reported a 5% rise in third-quarter revenue to $85.8bn ($84.4bn expected). Performance was driven by the 14% growth in Services and a 6% rise in sales across Mac, iPad, and Wearables. That more than offset a 1% decline in iPhone sales.
Operating profit rose 10.2% to $25.4bn, driven by higher revenue, better gross margins and slower growth in operating costs.
Free cash flow rose from $24.3bn to $26.7bn. Net debt was $39.5bn at the end of the period. There is an additional $91.2bn in long-term investment assets not included in those numbers.
There was a dividend of $0.25 announced and the company bought back $32bn worth of shares over the quarter.
Fourth quarter revenue is expected to grow at a similar rate, led by double-digit growth in Services.
The shares were broadly flat in pre-market trading.
Our view
Apple did what it needed to over the third quarter with beats on the top and bottom lines. The stock’s in somewhat of a holding pattern while investors wait eagerly to see whether new AI features can deliver the iPhone upgrade cycle needed to kick Apple into the next gear.
Having broken its AI silence over the quarter, this is a key moment for a business that’s struggled to deliver real innovation in recent times. Gone are the days when each new iPhone was so packed with new features that consumers felt obligated to upgrade every year.
Some estimates suggest close to 80% of iPhone users in the US are on models that are over 3 years old. None of which will be able to tap into the new AI tools. The hope for Apple is that there’s enough substance in the new features to drive a multi-year upgrade cycle – we think that could be the case.
Partnering with OpenAI brings a large model to Apple products, while the team focused on smaller on-device models to work in tandem. That’s significantly cheaper and keeping as much data as possible on-device helps Apple squash some of the privacy concerns users may have had.
Away from the AI craze, a note of caution stems from competition in China after several quarters of revenue declines. Other big names like Huawei are directly challenging Apple and capturing a portion of local market revenue in the process. Some of these rivals boast larger installed product bases and more attractive prices.
But there has been some good news out of China. Despite an overall decline in sales in the region, the quarter just gone set a record for upgrades, and the iPhone 15 is outperforming the previous model over the same period last year.
We're also encouraged by progress in Services - things like the App Store and Apple Music. This area of the business is higher margin because adding new users doesn't involve the same costs as building a MacBook or iPhone. But for Services to reach its full potential, it relies on growing hardware sales occurring in the first place.
While there are some extra risks to be considered, Apple's biggest asset remains its brand. The sheer scale of Apple's sales is testament to the grip that the shiny embossed piece of fruit has on global consumers. The loyal customer base means that there's an element of revenue visibility other businesses simply don't have.
Overall, we think Apple remains strong. It wasn’t first past the post in the AI race, but the cautious approach could end up being a shrewd move. We see further upside if AI features drive a multi-year upgrade cycle, but we must caution that this isn’t a magic wand. Economic conditions in the US are on a knife edge, Asia remains a tough battleground, and there are no guarantees.
Environmental, social and governance (ESG) risk
The technology sector is generally low-risk in terms of ESG, but some segments like Electronic Components can be more exposed to environmental risks. Regulatory interest in the sector has picked up recently, leading to more acute business ethics risks. Other key risks include labour relations, data privacy and product governance.
According to Sustainalytics, Apple's overall ESG management is strong.
Apple's huge scale means its primary ESG risk relates to business ethics, the management of which could do with some improvement. To address antitrust risks, the company has an antitrust and competition law policy. Despite these initiatives, Apple faces multiple intellectual property (IP) infringement claims, though these are not uncommon in the industry. Data privacy and security risks are managed extremely well, with security built into Apple’s hardware, software and services
Apple key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is not advice or a recommendation to buy, sell or hold any investment.No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.Non - independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place(including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.Please see our full non - independent research disclosure for more information.