According to a research report released by Everbright Overseas, Apple may focus on “end-side AI,” which is expected to gradually incorporate AI capabilities into the new Mac/iPad and various hardware products such as the iPhone 16 released in the second half of the year.
The Zhitong Finance App learned that Everbright released a research report overseas, saying that Apple (AAPL.US) may focus on “end-side AI,” which is expected to gradually integrate AI capabilities into various hardware products such as the new Mac/iPad and the iPhone 16 released in the second half of the year, and is expected to stimulate switching demand and drive hardware product revenue growth. It is recommended to pay attention to the Apple Global Developers Conference WWDC in June, when a new operating system and generative AI features may be announced. In addition, looking ahead to FY3Q24, Apple will host a special event on May 7, Beijing time. According to the Apple Pencil element in the poster, it is expected that the event will focus on releasing new iPads and accessories. The iPad Pro and Air series may usher in a major update. The company's iPad business is expected to recover along with new product sales. In response to the company's guidance, iPad revenue will achieve double-digit year-on-year growth in the next fiscal quarter.
In terms of investment, we continue to recommend Guoguang Electronics (01415). It is recommended to pay attention to Lixun Precision (002475.SZ), Shunyu Optical Technology (02382), BYD Electronics (00285), Ruisheng Technology (02018), Industrial-Fulian (601138.SH), Hongteng Precision (06088), etc.
Incident: Apple (AAPL.US) announced FY2Q24 (CY1Q24) results on May 3, Beijing time. In terms of revenue, revenue for the quarter was US$90.75 billion (yoy -4.3%), higher than Bloomberg's agreed estimate of US$90.33 billion (yoy -4.8%). It mainly benefited from the Mac and service business revenue performance exceeding expectations, while the revenue performance of the Greater China region was superior to market expectations. In terms of performance, FY2Q24's gross profit of $42.27 billion (yoy +0.7%) and gross profit margin of 46.6% (yoy+2.3pct, qoq+0.7pct) mainly benefited from improved revenue structure and cost savings; realized net profit of US$23.64 billion (yoy -2.2%), which was 1.5% higher than Bloomberg's agreed forecast of US$23.29 billion; diluted EPS reached 1.53 US dollars, the highest in history for the March quarter.
Everbright Overseas's main views are as follows:
Continuing to increase capital return, leading to a year-on-year increase in total revenue for the next fiscal quarter: At the FY2Q24 results meeting, Apple announced the largest share repurchase plan in the company's history of 110 billion US dollars and raised its quarterly dividend by 4% to 25 cents/share, achieving 12 consecutive years of dividend increases. Looking ahead to FY3Q24, Apple expects total revenue growth in the next fiscal quarter by a low single-digit year on year (estimated negative exchange rate impact of 2.5%). Among them, iPad and service business revenue will achieve double-digit year-on-year growth; the gross profit margin is expected to be between 45.5%-46.5%, and operating expenses are between 143-14.5 billion US dollars.
iPhone's revenue slightly exceeded expectations, and revenue in Greater China was significantly better than market expectations.
FY2Q24 iPhone revenue of 45.96 billion US dollars (yoy -10.5%), slightly higher than market expectations of 45.76 billion US dollars (yoy -10.9%). According to IDC, 1Q24 iPhone shipped 50.1 million units worldwide, yoy -9.6%, which was the main factor in the decline in revenue. However, management said that without considering the impact of the high base figure of 5 billion US dollars brought about by the release of demand in the same period last year, iPhone revenue remained basically flat this quarter. Furthermore, with regard to China, which the market was previously concerned about affecting iPhone shipping performance due to increased market competition, this quarter showed performance that exceeded expectations. FY2Q24 Apple achieved revenue of 16.37 billion US dollars in Greater China, a year-on-year decline of only 8.1%, better than Bloomberg's agreed decline of 10.9%. The judgment is mainly based on 1) iPhone still has customer stickiness in the high-end market. The company said that the iPhone 15/15 Pro is the two best-selling smartphones in Chinese cities; 2) Apple adopted diversified promotion strategies to reduce consumption Thresholds, such as installment payments, trade-in, etc. According to the results conference call, Cook said that sales feedback from the newly opened retail stores in Shanghai is currently good, and the company is still optimistic about the Chinese market for a long time.
New products have driven Mac performance to exceed expectations, leading to a return to growth in FY3Q24 iPad revenue.
The FY2Q24 Mac's revenue was 7.45 billion US dollars (yoy +3.9%), exceeding market expectations of 6.79 billion US dollars (yoy -5.3%), mainly benefiting from 3m24's release of a new MacBook Air product equipped with the M3 series high-performance chip. Apple described it as “the world's best consumer-grade AI PC,” and indicated that half of MacBook Air consumers were new users of the Mac series this quarter, and the number of Mac device users reached a record high. The FY2Q24 iPad's revenue was US$5.56 billion (yoy -16.7%), lower than market expectations of US$5.91 billion (yoy -11.4%), mainly due to the lack of new products affecting shipping performance. Looking ahead to FY3Q24, Apple will host a special event on May 7, Beijing time. According to the Apple Pencil element in the poster, it is expected that the event will focus on releasing new iPads and accessories. The iPad Pro and Air series may usher in a major update. The company's iPad business is expected to recover along with new product sales. In line with the company's guidelines, iPad revenue for the next fiscal quarter will achieve double-digit year-on-year growth.
Half of the Fortune 100 companies have already purchased Vision Pro to keep an eye on WWDC AI developments in June.
Other hardware revenue such as FY2Q24 wearables was 7.91 billion US dollars (yoy -9.6%), slightly lower than Bloomberg's agreed estimate of 8.29 billion US dollars. Mainly AirPods and Apple Watch have not been updated, and Vision Pro has not yet been sold outside of the US. Apple has yet to disclose Vision Pro sales figures at this performance conference, but it said that the device is attracting the interest of B-side customers. More than half of the Fortune 100 companies have purchased Vision Pro and started the spatial computing experience. Regarding AI, Apple said it is very optimistic about the future of AI and is making major investments in this field; Apple's seamless hardware infrastructure, ingenious combination of software and services, self-developed high-performance chips, and the importance it will place great emphasis on user privacy and security will become the company's core advantages in AI competition. It is recommended to pay attention to Apple's disclosure of the progress of AI layout at the WWDC conference in June.
Service revenue achieved 6 consecutive quarters of month-on-month growth, and gross margin continued to increase month-on-month.
FY2Q24's service revenue was US$23.87 billion (yoy +14.9%), exceeding market expectations of US$23.28 billion (yoy +11.4%), and achieved a record high for the sixth consecutive quarter. We believe it was mainly due to diverse service categories and a continuously growing active equipment base. According to the company's results, all Apple products and the number of active devices in all regions reached a record high this quarter. A strong hardware base and continuously upgraded service categories have laid a solid foundation for continued growth in participation in the Apple ecosystem. The gross margin of the FY2Q24 service business reached 74.6%, an increase of 1.8 pcts over the previous month, mainly due to a more favorable combination of service categories. The company indicates that FY3Q24 service revenue will maintain year-on-year double-digit growth similar to FY1H24 (FY1H24 service revenue YoY +12.7%).
Investment advice: Earlier, it was mentioned in the FY1Q24 review that the market may have amplified the extent of the impact of iPhone shipments under pressure in China, and the results announced now confirm the previous view to a certain extent. Looking to the future, I think:
1) Apple's core competitiveness is its continuous innovation ability, strong brand power and user stickiness, and the closed loop of Apple OS's highly collaborative ecosystem. With the continuously growing hardware base within the Apple ecosystem, the service business with higher profit margins is expected to further penetrate and provide the company with steady profitability;
2) The company announced that it would stop building cars and focus more resources on AI investment this quarter, so the company's development of generative AI will be the core focus of market attention in the short term. The bank believes that Apple may focus on “end-side AI,” which is expected to gradually integrate AI capabilities into various hardware products such as the new Mac/iPad and the iPhone 16 released in the second half of the year, and is expected to stimulate switch demand and drive hardware product revenue growth. It is recommended to pay attention to the Apple Global Developers Conference WWDC in June, when a new operating system and generative AI features may be announced.
3) Apple has continued to insist on large repurchases and dividends for many years. This quarter, it announced a $110 billion repurchase plan to further increase shareholders' return on capital, and is still attractive from the perspective of asset investment allocation.
Risk warning: Hardware product sales fall short of expectations, service subscription business growth is slowing down, MR business development falls short of expectations, technology upgrades fall short of expectations, etc.