Apple Reports Strong Third Quarter, But Services Growth Slow

Ticker Symbol: AAPL

Apple Inc., the world’s largest firm by market capitalization, reported a beat on most financial metrics in its third-quarter earnings results. Despite surging COVID cases and lockdowns in China, supply chain issues, foreign exchange headwinds, and an impending global recession, the company posted a record June quarter that was generally ahead of Wall Street consensus expectations. Shares were up 3.5% in the morning trading session. Apple is also outperforming the S&P 500 for the year, with shares down 10%, versus the 14.4% decline in the benchmark.

The company’s third-quarter adjusted earnings per share of $1.20 versus the expectation of $1.16. Revenue was up 1.9% year over year to $82.96 billion, also ahead of the average analyst estimate for sales to be $82.76 billion. Products revenue was down 0.9% year over year to $63.36 billion, higher than the estimated $62.44 billion. Within products, iPhone revenue jumped 2.8% over the same period last year to $40.67 billion, well ahead of the forecasted $38.9 billion. Mac revenue was the biggest sore spot, declining almost 10% to $7.38 billion, shy of estimates by almost a billion dollars.

Services revenue, the money Apple generates predominantly from its licensing fees with companies such as Google and the App Store, came in at $19.6 billion but lower than the estimated $19.75 billion that investors wanted to see. Service revenue grew 12% year over year, but that’s significantly slower than the 32.9% growth rate the division reported in the third quarter of 2021. It is also lower than the 17% growth Apple recorded in the second quarter of this year. The Service division is key for Apple as it is a high-margin, low-volatility business.

Chief Financial Officer Luca Maestri mentioned that the company’s installed base, or the number of users of Apple’s various products, grew to a record high across every geographic and product category. He also noted that the company now has over 860 million paid subscriptions across its services platforms. Apple’s subscription services, such as Apple Music and Apple TV+ have continued to perform well for the company. Apple’s customers also tend to have high household incomes, which could serve as a buffer against a decline in demand in the case of a recession.

Furthermore, Apple’s fortress balance sheet, its large buyback program, and its stellar execution capabilities could also counter potential economic headwinds. At roughly 26 times forward earnings, Apple is cheaper than many other technology companies. Its gross margin of 43.3% in the second quarter is rare amongst companies that make physical goods, while its net income margin of 23% is one of the highest of any large-cap company in the world. The company generated $23 billion in operating cash flow during the quarter. Management also provided upbeat commentary for the second half of the year.

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