Repurchase Plus Dividends! What Exactly are We Buying When We Buy AAPL?

Apple released its 23Q1 results after the market closed, and the stock price rose by more than 2% after the financial report was released.

The core business has demonstrated a strong ability to resist risks. In 23Q1, the company's revenue was US$94.836 billion, a year-on-year decrease of 2.51%, declining for two consecutive quarters, but the decline was narrower than that of the previous quarter (-5.48%). In terms of business, the two core businesses of service business and iPhone business lead the growth in revenue growth, reflecting the extremely high risk resistance ability of the core business. In terms of regions, the Asia-Pacific emerging markets have the fastest revenue growth, with a year-on-year increase of 15.29%, which is the company's main source of new revenue.

The gross profit margin was stable, but the net profit margin declined slightly, mainly due to the increase in marketing expenses due to destocking. The company's gross profit fell by 1.37% year-on-year to US$41.976 billion, and the gross profit margin rose to 44.26%. 23Q1 operating profit fell by 5.54% year-on-year to US$28.318 billion, a decline that was significantly narrower than the previous quarter, and the operating profit margin fell to 29.9% quarter-on-quarter. The net profit margin was 25.48%, basically flat compared to the previous quarter (25.61%).

The company's operating profit and net profit margin declined slightly from the previous quarter, mainly due to the significant increase in marketing expenses and R&D expenses. Among them, 23Q1 marketing and management expenses increased by 20.41% year-on-year to US$7.457 billion, mainly due to the increase in promotional activities such as destocking, while research and development expenses increased by 16.75% year-on-year to US$7.457 billion.

Emerging markets drive iPhone revenue growth. In 23Q1, the company's iPhone business revenue was US$51.334 billion, YoY+1.51%, exceeding market expectations (US$48.7 billion). iPhone business income is strong. On the one hand, it is because the supply chain in China returned to normal after the epidemic blockade was lifted at the end of last year, and part of the purchase demand was postponed to the first quarter.

On the other hand, it is because the sales growth of iPhone in emerging markets such as India, Indonesia, Latin America and the Middle East is very strong, and the penetration rate of iPhone in emerging markets has increased. The Indian market is currently a key development market for Apple. In the first quarter, iPhone sales in India increased by 50% year-on-year, accounting for 6% of the market share. The market share in the high-end and ultra-high-end markets in India was as high as 36% and 62%, respectively. It is expected that there is room for further improvement.

The increase in iPhone revenue is mainly due to the increase in the ASP. According to IDC data, global smartphone shipments in 23Q1 fell by 14.6% year-on-year, and the iPhone was also not immune to the crisis, with shipments down 2.3%, but it is already the strongest among all mobile phone manufacturers. Therefore, the growth of iPhone revenue in the first quarter is not due to the increase in shipments, but due to the increase in the price of a single machine. In addition, it is worth noting that the 23Q1 iPhone market share increased again to 20.5%, which is the largest increase in market share among the top five mobile phone manufacturers in the world.

Judging from the sales of the iPhone 14 series, consumer preferences continue to tilt towards the Pro high-end models of the iPhone series, driving a significant increase in ASP. According to data from Consumer Intelligence Research Partners, iPhone 14 Pro Max sales accounted for 24% of total iPhone sales, followed by iPhone 14 Pro, which accounted for 22% of sales, and Pro series high-end models accounted for nearly 46%. The strategic role of high-end models is obvious. In the context of the downturn in consumer electronics, the creation of high-end models has effectively boosted revenue growth. Demand for iPhone Pro models pushed the average iPhone selling price to $988 in the January-March quarter, compared with just $802 in the same period in 2019, according to Consumer Intelligence Research Partners.

The revenue growth rate of the service business led the way, and the growth of paying users was strong. In 23Q1, the company's service business revenue was 20.907 billion US dollars, YoY+5.48%. Service products such as digital advertising and AppStore are still affected by the macro environment. The large-scale hardware user base that continues to grow is an important force driving the continuous growth of the company's service business. As of now, Apple's active device installation base exceeds 2 billion, and the iPhone's active installation base exceeds 1 billion. At the same time, user participation in service products increased in the first quarter, and transaction accounts and payment accounts achieved double-digit year-on-year growth, both hitting record highs. In addition, the number of paid subscription users has grown strongly. As of now, the number of paid subscriptions for all service products on the platform has exceeded 975 million, an increase of 150 million year-on-year.

The gross profit margin of the service business remains at a relatively high level. In 23Q1, the gross profit margin of the company's service business reached 71%, which has rebounded from the previous quarter, raising the company's profit level (the overall gross profit margin of the hardware business is 36.7%).

In 23Q1, the company's Mac business revenue was US$7.168 billion, a year-on-year decrease of 31.31%, which was mainly affected by the weak PC market and the launch of the popular new M1 MacBook Pro in the same period last year.

Dividends and buybacks are expected to deliver a deterministic annual return of 3.57%. The company announced an additional repurchase amount of US$90 billion, which is basically the same as last year. It is expected that the repurchase will be completed within one year, which is approximately equal to a return rate of 3.43%. Concurrently, the company declared a cash dividend of $0.24 per share, an increase of approximately 4%, payable on May 18, 2023 to shareholders of record as of the close of business on May 15, 2023. Combining buybacks and cash dividends is expected to deliver an annualized return of 3.57%. However, considering that the company's cash scale is constantly declining, it is not expected that the scale of future repurchases will increase too much.