During Apple Inc.'s (AAPL, Financial) fiscal third-quarter earnings call on Aug. 3, CEO Tim Cook and Chief Financial Officer Luca Maestri discussed factors that impacted the company's performance.
Maestri clarified that the guidance provided was based on reported numbers, taking into account a slight improvement in foreign exchange rates. He mentioned that the company expected an acceleration in iPhone and services performance on a reported basis, while projecting double-digit declines in iPad and Mac sales. Maestri attributed the decline in the latter two categories to the challenging comparison with the previous year, when there were factory shutdowns due to the pandemic.
Cook highlighted the tech company's exceptional performance in emerging markets, particularly in China, where it experienced a significant acceleration in growth. He also mentioned that the U.S. market showed a slight sequential acceleration, although it continued to decline year over year due to the challenging smartphone market. In Europe, Apple achieved a record quarter, indicating positive signs in most regions worldwide.
Impact of currency fluctuations
Piper Sandler analyst Harsh Kumar asked about the potential impact of currency fluctuations on Apple's revenues and costs. Maestri explained that a weaker dollar, if it were to occur, could benefit the company by reducing the currency headwinds it has faced in recent quarters.
Operating expenses and gross margins
Morgan Stanley's Erik Woodring raised a question about Apple's operating expenses, noting they had been growing below historical seasonality for the past three quarters. Maestri responded by stating the company has been deliberate in controlling its spending, slowing down hiring in various areas and effectively decelerating expense growth. He emphasized that Apple will continue to manage its expenses with a focus on innovation and product development.
Regarding gross margins, Maestri mentioned the company achieved an all-time record of 44.5% in the June quarter, driven by cost savings and a favorable product mix, but partially offset by foreign exchange impacts. He expressed confidence in maintaining a similar level for the September quarter, considering the favorable commodity environment and strong product mix.
Apple and generative AI
One of the analysts, Sidney Ho from Deutsche Bank, inquired about Apple's approach to artificial intelligence and how it would translate into financial performance. Ho noted that Apple's AI strategy seemed different from its peers, as the company did not discuss it extensively. Ho asked whether the investment in AI would primarily result in a faster upgrade cycle, higher average selling prices or the development of additional services.
Maestri responded to Ho's question, stating the company indeed had a unique approach to AI. While he did not provide specific details, he highlighted that Apple's focus is on integrating AI capabilities into its products and services seamlessly. He mentioned that the investment in AI would contribute to the overall financial performance of the company through various avenues, including potential upgrades, higher ASP and the development of new services.
For me, Apple does seem to be late to the generative AI game, but is not it always late? It has played fast second many times before. The personal computer came before the Apple IIe, Zune was before the iPod and Nokia and Palm had smart phones before the iPhone. I do not count Apple out in AI either.
Services segment
The discussion also touched on the company's Services segment, which outperformed expectations in the third quarter, showing double-digit growth on a foreign exchange-neutral basis. Goldman Sachs' Michael Ng inquired about the drivers behind the confidence in Services' acceleration for the next quarter. While acknowledging the impact of foreign exchange, Maestri highlighted Apple's investments in Apple Search Ads and Apple TV+ as contributing factors.
Cook also responded to Ng's question, expressing his satisfaction with the Services segment's performance. While he did not provide specific details about the drivers of the Services acceleration, he mentioned that Apple's ongoing investments in Apple Search Ads and Apple TV+ were indeed contributing factors. The CEO emphasized the company's commitment to enhancing the overall customer experience and expanding its services ecosystem.
Retail stores
Krish Sankar from TD Cowen raised a question regarding Apple's retail stores and the foot traffic trends. He noted that many of Apple's stores have been open for over a year and inquired about the foot traffic and sales trends in the June quarter. He sought insights into the implications for the back half of the year on a seasonality basis.
Cook addressed Sankar's question, saying Apple's retail stores continued to experience significant foot traffic. While he did not provide specific figures, Cook expressed optimism about the sales and retail trends in the June quarter. He mentioned the company is closely monitoring the foot traffic and sales data to assess the overall performance and make informed decisions for the future.
Conclusion
Overall, the comments made by Apple's executives during the earnings call highlight its strengths in emerging markets, challenges in certain product categories and the deliberate management of expenses. The discussion also shed light on the positive outlook for Services and the potential impact of currency fluctuations on the company's financials. Once again, Apple has impressed investors with its strong financial performance. Its strong performance in the Services segment and positive retail trends contribute to the overall positive outlook for the stock.
