Apple posted strong Q3 numbers on the backs of a reinvigorated iPad and ongoing growth in their high-margin services business. But all eyes are on what happens next. September is the traditional iPhone refresh window, and this refresh cycle will be the first with the promise of Apple Intelligence. These smarter, more personal experiences on Apple devices are expected to drive significant revenue as customers upgrade their devices to be compatible with Apple Intelligence.
Here are some key takeaways from the Apple chatter surrounding their earnings release:
It’s Always About The Crown Jewel.
Let’s face it—as goes the iPhone, so goes Apple’s fortunes. The iPhone makes up more than half of Apple’s revenue and around 70% of the product revenue. Seventeen years after its launch, the iPhone continues to be the cornerstone of the business. Much of Apple’s fortune is tied to how this product line performs, be it in upgrade cycles or making inroads into traditionally weaker markets like China and India.
On The Cusp Of Apple Intelligence.
Apple Intelligence, first introduced at June’s WWDC, will be a significant factor not just because of Apple’s AI ambitions but because it can potentially drive a mammoth upgrade cycle for the iPhone. As Apple plans to limit backward compatibility of the goodness of its Apple Intelligence to the iPhone 15 Pro and Pro Max, it will likely drive significant upgrades from older devices. Rumors about delays in the roadworthiness of Apple Intelligence will have implications for the iPhone 16 upgrade cycle and significant revenue ramifications.
Apple Needs China To Work.
Large, underpenetrated markets like China and India will continue to affect Apple’s business materially. Greater China, for example, makes up almost 20% of Apple’s revenue, but the company dropped out of the top 5 smartphone brands in the region. In these Asian markets, Apple faces formidable competitors and lower-priced alternatives that cater better to price-sensitive consumers. In China, which Tim Cook has described as the “most competitive market in the world,” Apple has discounted its phones (a practice it abhors in most Western markets) to claw back some share.
Services Go Marching On.
Quarter after quarter after quarter, services continue their unrelenting onward march, further growing Apple’s portfolio while diversifying it away from devices. This category has grown to more than a quarter of Apple’s revenue, but even more significantly, it’s a profit beast, with gross margins double that of products and in the neighborhood of 75%. The only dark clouds that linger have to do with regulatory and antitrust issues that could stymie some of the services growth, although any short-term impact is unlikely.
The Tepid Vision Pro Sales Is A Red Herring.
The Apple Vision Pro may be struggling to gain traction, but then again, did anyone seriously believe for a minute that a $3,500 headset was Apple’s next blockbuster? Apple has taken a different tact with the Vision Pro; it’s the first move in a long game. Yes, there will be a cheaper and more affordable headset in the future, and yes, it will probably still be too expensive, but Apple is figuring out in real time how to build another gateway into its ecosystem, one that works without relying on touch and a keyboard. Give the brand some time, and it may well redefine yet another category.
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