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Apple Reports 3Q 2022 Results: $19.4B Profit on $83B Revenue

Apple today announced (https://www.apple.com/newsroom/2022/07/apple-reports-third-quarter-results/) financial results for its third fiscal quarter of 2022, which corresponds to the second calendar quarter of the year.



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For the quarter, Apple posted revenue of $83 billion and net quarterly profit of $19.4 billion, or $1.20 per diluted share, compared to revenue of $81.4 billion and net quarterly profit of $21.7 billion, or $1.30 per diluted share, in the year-ago quarter (https://www.macrumors.com/2021/07/27/apple-3q-2021-earnings/).



Gross margin for the quarter was 43.3 percent, according to Apple CFO Luca Maestri. Apple also declared a quarterly dividend payment of $0.23 per share, payable on August 11 to shareholders of record as of August 8.



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iPhone and Services revenue achieved June quarter records, while Mac, iPad, and "Wearables, Home, and Accessories" revenue was down.



A category-by-category breakdown of Apple's Q3 2022 revenue is outlined below.<ul><li>iPhone: $40.6B, up from $39.5B in year-ago quarter</li>

<li>iPad: $7.2B, down from $7.3B in year-ago quarter</li>

<li>Mac: $7.3B, down from $8.2B in year-ago quarter</li>

<li>Wearables, Home, and Accessories: $8.0B, down from $8.7B in year-ago quarter</li>

<li>Services: $19.6B, up from $17.4B in year-ago quarter</li></ul>Apple CEO Tim Cook:

This quarter's record results speak to Apple's constant efforts to innovate, to advance new possibilities, and to enrich the lives of our customers. As always, we are leading with our values, and expressing them in everything we build, from new features that are designed to protect user privacy and security, to tools that will enhance accessibility, part of our longstanding commitment to create products for everyone.

As has been the case for over two years now, Apple is once again not issuing guidance for the current quarter ending in September.



A recap of Apple's fiscal Q3 2022 financial results conference call can be found below.

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1:37 pm: Apple shares are up more than 3 percent after hours on the earnings report.



2:00 pm: The earnings call will begin soon, likely with Apple CEO Tim Cook and Apple CFO Luca Maestri sharing more detail on the quarter and answering analyst questions.



2:00 pm: The call is beginning.



2:01 pm: The Apple team appears to be having technical difficulties, as there is now silence on the call after the initial introduction by the operator.



2:03 pm: The introduction is happening again, hopefully with a more successful connection!



2:03 pm: Apple CEO Tim Cook and Apple CFO Luca Maestri are on the call.



2:05 pm: Tim Cook says Apple is reporting another record June quarter, and the revenue was better than expected. June quarter records in the Americas, Europe, and the rest of AsiaPac. Records in developed and emerging markets with double digit growth in Brazil, Indonesia and Vietnam, and doubling in India. All-time record for installed base of active devices. Supply constraints were less than expected, slightly below the range discussed on the prior call.



2:05 pm: Challenges from Covid, Ukraine, and uncertain economic environment. Much of the world is living through uneasy times. Apple is working hard to help customers navigate the world as it is, while empowering them to create the world as it can be.



2:07 pm: iPhone set June quarter records for revenue and switchers. Now Tim is name-checking products introduced during the quarter, including MacBook Air.



2:07 pm: iPad and Mac saw strong demand despite ongoing supply constraints.



2:08 pm: New updates of iOS are all in public beta. Expected to come out in the fall.



2:09 pm: Cook is going through more current products and updates, though not much business-related data.



2:09 pm: On Services, revenue rose to $19.6 billion, June quarter record and 12% increase year over year.



2:10 pm: Talking about Apple TV+ content. 250 wins and more than 1,100 award nominations and counting. Apple TV+ earned 52 Emmy award nominations across 13 titles. Friday Night Baseball on Apple TV+, Major League Soccer matches around the world on Apple TV+.



2:11 pm: At WWDC, Apple had developers out to Apple Park and connected remotely around the world.



2:11 pm: 2.2 million jobs supported by the App Economy and many more around the world.



2:11 pm: In 2021, we prevented nearly $1.5 billion in fraudulent transactions by stopping more than 1.6 million risky apps and app udpates.



2:12 pm: In Retail, opened a store in a new province in China, and another in Central London.



2:13 pm: Talking about Apple's commitment to diversity and inclusion, and racial equity and justice.



2:14 pm: Touching on Passkey, "a next-generation credential to replace passwords".



2:14 pm: New Lockdown Mode, designed to protect those at risk for sophisticated digital attacks.



2:14 pm: Apple has deployed $1.3 billion to a number of initiatives to help low- and moderate-income homeowners and other groups.



2:15 pm: The call seems less business-focused and more public relations and lobbying than normal.



2:15 pm: Luca Maestri is coming on to talk numbers.



2:16 pm: June quarter financial results that demonstrate Apple's ability to innovate, while operating the business effectively during challenging economic circumstances. $83 billion revenue, june record, 300 bp of FX headwinds, and loss of Russia business.  Product, revenue $63.4 billion with June quarter revenue record for iPhone.



2:16 pm: All-time high of installed devices for all major product categories and geographic segments.



2:16 pm: All-time revenue records for Services in Americas and AsiaPac. June quarter records in Europe and Greater China.



2:17 pm: Gross margin was 43.3%, down 40 bp. Seasonal loss of leverage and unfavorable FX were offset by favorable mix. 34.5% product margin.



2:17 pm: Services GM was 71.5%, down 110bp due to mix and FX.



2:17 pm: $19.4 billion net income, diluted earnings per share were $1.20.



2:18 pm: iPhone revenue up 3% YoY. Customer response to iPhone 13 family continues to be strong. iPhone active install base reached new all-time high across all geographies. Latest survey of US consumers from 451 research indicates 98% customer satisfaction. Record number of switchers with strong double-digit year over year growth.



2:19 pm: Mac $7.4 billion despite supply constraints and negative FX. Investment focus on Mac is to drive significant growth in the installed base. Nearly half of Mac customers were switchers.



2:19 pm: $8.1 billion, down 8% on home and accessories.



2:20 pm: Apple Watch continues to extend its reach with more than 2/3 customers new to the product.



2:20 pm: Services set June quarter revenue record. Almost 500 basis points of FX headwinds, plus business in Russia and macro environment.



2:21 pm: 860 million total paid subscriptions across all services, up 160 million in the last 12 months.



2:23 pm: $179 billion in cash and securities, repaid $3b in expiring debt. $120b in total debt. Nearly $60b in cash.



2:23 pm: We continue to believe in our stock and have a target of reaching a net cash neutral position over time.



2:24 pm: Given continued uncertainty, we are not providing revenue guidance, but some directional insights based on the assumption that the macroeconomic outlook and covid impacts to the business do not worsen. Overall, year over year revenue growth will accelerate in the September quarter vs the June quarter, despite 600 basis points of negative year over year impact from FX. Product, supply constraints should be power than June quarter. For Services, revenue will grow but decelerate in the June quarter due to macro factors and FX.



2:24 pm: 41.5-42.5 gross margin. OpEx $12.9-15.1b. Tax rate around 16%.



2:25 pm: Cash dividend of $0.23/share payable on August 11, to shareholders of record as of August 08.



2:25 pm: They are opening the call to questions from analysts.



2:26 pm: Q: On Gross Margin, implied GM down 130-140 bp sequentially, more info?



A: Guiding 41.5-42.5%. On sequential basis the decline is expected to be driven by foreign exchange and mix, partially offset by better leverage. We expect FX impact on a sequential basis to be 50bp. YoY standpoint, we're in the ballpark of a year ago in spite of the fact that FX is 130bp negative to a year ago. We think we're navigating this fairly well.



2:28 pm: Q: Macro worries on inflation and consumer demand, don't see that in your performance and expectations. Any implications of recession or inflation fears?



A: Tim: I'm not an economist, so I'll narrow my comments to what we saw in the business. Look at the June quarter, we believe we saw macro headwinds that impacted our business and results. One of those is FX, over 300bp on YoY growth rates. Look at the product categories, on iPhone, no obvious impacts aside from FX. Mac and iPad were so gated by supply that we didn't have enough product to test demand. Wearables, Home and Accessories, we did see some impact there that we would attribute to macroeconomic environment. When you look at Services, there were some Services that were impacted. Digital advertising were impacted by macroeconomic environment. Mixed bag in terms of what we believe that we saw. Overall, we're very happy with the results and when you think about the number of challenges in the quarter, we feel really good about the growth that we've put up for the quarter.



2:31 pm: Q: Looking at Services, $20b on a quarterly basis. Adding interesting and transformative features. Struggling to find a good way to think about how to model the growth of this business.



A: The way we think about it, there are a number of levers to take into account. First one is installed base, the engine for our company and it continues to grow. It's reached an all-time high across every product category. The second lever is customer engagement. Customers are getting more engaged, transacting accounts, paid accounts, paid subscriptions. Breadth and quality of services tends to grow over time. Tend to help us over the long term. If you go back and look at our growth rates over a number of quarters now, they've always been very good. Macro has an impact on this business, digital advertising can be affected at times. During covid, some of the compares have been a bit lumpy. Lockdowns and reopenings and so-on, difficult to talk about a steady-state growth rate for services business. Entirety of Services, we feel good about the future of the business.



2:32 pm: Q: Valuations have come down for things and companies, targets that you might look at. Particularly in Services, would there be an appetite to accelerate growth of services by looking at external products to acquire.



A: We always look and we ask ourselves how strategic it is, and we never buy just to buy or buy for revenue. We would buy something that is strategic. To date we have concentrated on smaller IP and people acquisitions and I wouldn't rule anything out for the future and obviously we are constantly surveilling the market.



2:35 pm: Q: Two years into 5G, can you walk us through various factors that are driving iPhone strength?



A: It's the product and innovation in the product that's driving it. Key variables such as size of the installed base have been growing significantly, June quarter record for switchers with strong double-digit growth. Fueling installed base. Continue to execute across significant geographies with low penetration of iPhones. Indonesia, Vietnam, India. iPhone tends to be the engine for those markets, particularly at the beginning of creating the market for Apple products. We're really looking at all of these things, installed base to switchers to geographic distribution. The most important thing for us is to maintain incredible customer satisfaction and loyalty. 98% for iPhone. 5G has been an accelerant. 5G penetration, particularly globally, is still quite low. In some geographics it's higher, but 5G is still quite low. There's reason to be optimistic.



2:37 pm: Q: Moving pieces in the Services, where can we see acceleration and deceleration?



A: Deceleration... 6% impact from FX overall, a big element for us. Digital advertising slowdown for us to work through. Services grew a lot last year so the compare is challenging. Don't have a specific number to give out, we expect to grow but we will see how the quarter develops.



2:38 pm: Q: Privacy policies you've put in place have reshaped the mobile ad market. What's Apple's role as an ad company, how to help developers drive sales and monetization?



A: We view privacy as a fundamental human right. What we try to do with all of our features on privacy is put the decision back at the user where we believe it belongs as to whether they want to share their data or not. That was what was behind application tracking transparency and a number of other features, we're trying to empower the user to own their data and make their own choices. In terms of us selling ads, we have a Search Ads business across the App Store that believes represents a great way for discovery for small and large developers and I see that we play a role in that.



2:40 pm: Q: What steps might you be taking to improve affordability of Apple products, come out with Pay Later, how do you see the evolution of various payment plans from the US to other markets?



A: Affordability is a very important topic for us, has been for many years. Buy now, pay later is the latest that we're doing on this front. Fundamentally we're working on two major initiatives for affordability. Installment plans, and they've become more widespread around the world, not just here in the US, especially in emerging markets. Trade-in programs are available in a number of markets, we can do better in other markets, but they're incredibly important because the residual value of our products is a huge differentiator for our users. They can bring them back and they retain much more value than other platforms. Important to raise that awareness. Installments and trade-ins are important on affordability.



2:41 pm: Q: Circle back on macro and demand signals, there's been a couple US carriers that have talked about customers having difficulties paying bills. Saw record number of switchers. What are you seeing in that channel and are you seeing any issues from spin-down effect as customers having some difficulties because of inflation?



A: From an aggregate point of view, worldwide, looking at the data on iPhone for the June quarter, there's not obvious evidence in there that there's a macroeconomic headwind. I'm not saying there isn't one, but the data doesn't show it. We can clearly see it in Wearables, Home and Accessories area. I would differentiate those two.



2:44 pm: Q: Impact of the market overall on the Mac, sounds like it's all supply chain, but are you seeing evidence of the broader PC market slowing? With M2 chip you were confident you could continue to grow throughout a drawdown in that market? Do you still believe that and how do you feel about your growth vs the market?



A: For last quarter, what we saw was when the covid restrictions hit in the Shanghai corridor, we lost the primary source of supply for Mac units. That was either running at a reduced rate or down completely for the majority of the quarter. It was a very big impact to the Mac business. We felt good, frankly, that we were able to, by the end of the quarter, get this back to where we were down 10 points. The negative 10, I would classify that as being driven by supply and FX feeds into this as well because of translation issues around the world. There's also some impact because of the business in Russia, but those are the three kind of reasons that I would tell you.



In terms of testing the demand, you can't really test demand unless you have the supply. We were so far from that last quarter that we have an estimate of what we believe demand was, but it is an estimate. We recognize how the industry is doing, we think that we've got a great story with the Mac, getting M1 out and now M2 out, we have a very strong offering for the back to school season and we'll see how we do this quarter. We'll report back in October.



2:46 pm: Q: Can you share on supply headwinds, less severe or less worse supply challenges into September, when do you find balance across products and any thoughts on how that affects replenishment of supply into retail channels?



A: More color on what we saw in June, we came in slightly below from a constraint point of view the $4 billion number, low end of $4-8 billion that we predicted. The majority of that constraint last quarter was coming out of the covid restrictions that resulted in plants running at less than full utilization for some amount of the quarter, or the majority of the quarter. The other component that is the minority part, the silicon shortage that has affected our results for several quarters now. If you look into the future, the silicon shortage, we're not forecasting when that will end. In the aggregate, our constraint numbers for Sept will be less than June. The two components, we're optimistic about covid restriction piece.



2:47 pm: Q: How are you thinking, evolving strategy in AR/VR and your existing products, content or how you're thinking about that opportunity?



A: We're thrilled right now to have more than 14,000 ARKit apps in the App Store. They're providing incredible AR experiences for millions of people. That's utilizing iPhone and iPad. And, of course, we're in the business of innovation so we're always exploring new and emerging technologies but I wouldn't want to say anything beyond that.



2:49 pm: Q: September vs June growth rate, would it be reasonable to assume normal seasonality of $7 billion or so or are there additional puts and takes that could drive upside and downside on that? FX potentially one of those, but on sequential basis, how much of normal vs abnormal seasonality?



A: We are not providing guidance because of uncertainty out there, but we have given a few data points. One of them that you mentioned, 600bp of negative FX, you do the rough math and it's around $5 billion. That's a big number right there that's going to affect us. Impact from the situation in Russia, that is different from normal seasonality as well. Our supply constraints as Tim said are going to be lower than in June, but they're still going to be there. When you look at those three headwinds, plus deceleration that we talked about, we think it's pretty remarkable.



2:52 pm: Q: Macro impact on wearables, it's at the lowest ASP range across your product portfolio. As you're giving this guidance, how much of an impact are you assuming in potentially any macro-related slowdowns across the rest of the portfolio? Why would we not think some sort of creep up or hesitation that the macro environment as it pertains to higher ASP products.



A: Wearables, Home and Accessories... we saw sort of a cocktail of headwinds on wearables, home and accessories. FX, supply constraints, impact from business in Russia. But in addition to those things, which affected all the products, we also had a different launch timing for certain Home and Accessory products. Year ago had AirTag in it, one example of something that announced last year that didn't announce this year, or a comparable announcement this year. In addition to those four items, we believe that there was a macro environment hit and, whether or not that is because they are lower ASPs vs higher ASP of a phone, I can't tell you that. Looking at the numbers, there does appear to be headwinds in addition to the four items above, and we believe those to be macroeconomic headwinds.



2:53 pm: Q: China smartphone market, haven't seen a material impact of macro on iPhone yet, did you see impact of covid lockdowns there on demand, or was there a snapback? What was the exit run rate on covid shutdowns ending?



A: Both things are true, we did see a lower demand based on covid lockdowns, and we did see a rebound in those cities towards the end of the June quarter, in particular in the run-up to June 18 which is a major shopping holiday in China. We think that the net is still a negative but some of it did rebound by June timeframe. Restrictions came down in early June.



2:54 pm: Q: Hiring slowdowns?



A: We are being more deliberate in hiring, in recognition of the realities of the environment.



2:56 pm: Q: Calling you on my iPhone 13 Max Pro, with replacement cycles now that we've been through 2.5 years of covid, are people upgrading at a different rate, when I drop and break my phone I replace it immediately, but normal replacements have they changed at all?



A: It's challenging to measure the replacement cycle with any precision, so I'm gonna punt on that. Our key task is to make a product that everybody loves and people want to trade in their current phone to get. That's what we're focusing on is to innovate like crazy and give people something they really want and see themselves using.



2:58 pm: Q: On gross margin, as you look ahead to supply chain issues, expedited shipping and all of that, is September quarter the worst of FX due to suppliers looking at higher costs, or older contracts expiring?



A: We provide guidance for the current quarter, but looking ahead, there are always a couple of elements that are a bit outside of our control and we need to be mindful of that. One is foreign exchange, that is having an impact already for September, had an impact on June, and strong dollar tends to be a headwind for us. We have a hedging program so we mitigate that impact but over time those hedges roll off and it becomes more challenging for us. We'll see what happens with FX over time, that is a variable we'll need to track.



Impact on aggregate gross margin is our mix or products and services. Different margin profiles, different businesses, different accounting treatment at times. Something we need to track over time. People love our products and services and we want them to all to be successful on the marketplace. We have had a significant expansion of gross margin, despite difficult economic circumstances. From commodities standpoint, asking about components, commodities are behaving okay, we've seen some price pressure on silicon components, but commodities are behaving well.



3:00 pm: Q: Apologies, it's also macro related. Digital advertising within services, if the macro does worsen, do you worry about subscriber growth on apps and etc, and any parts of services that are recession-proof?



A: We have incorporated all our thoughts into the guidance that Luca gave. In aggregate we plan to accelerate revenues in the quarter, and decelerate on the services side. Digital advertising clouds will continue in the current quarter.



3:00 pm: Q: On lockdown in China during June quarter, did you see negative effect on App Store revenue for the region, or positive effects like more gaming downloads?



A: China had very good results on Services last quarter, and so they grew strong double-digits, better than the company average. Set a new June quarter revenue record.



3:01 pm: The call is complete.<div class="linkback">Tag: Earnings (https://www.macrumors.com/guide/earnings/)</div>
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Source: Apple Reports 3Q 2022 Results: $19.4B Profit on $83B Revenue (https://www.macrumors.com/2022/07/28/apple-3q-2022-results/)