The warning in Apple's financial report: the unsellable China field and the lagging AI layout

Original source: Silicon-based laboratory

Image source: Generated by Unbounded AI

Apple once again delivered a "mixed" quarterly earnings report.

On November 3, Apple announced its financial results for the new fiscal quarter of 2023, with total revenue of $89.5 billion and quarterly net profit of $23 billion and diluted earnings per share of $1.46 in the third quarter of 2023. For comparison, Apple's total revenue was $90.1 billion, quarterly net income was $20.7 billion, and diluted earnings per share were $1.29 in the same period last year.

The good news is that Apple still confirms its ability to make money, and the strategy of integrating software and hardware, especially the high-margin software service business, drives the growth of the profit side.

The bad news is weak growth and the sluggish Chinese market, Wall Street had expected revenue growth of about 5% in the current quarter, as Q3 2023 is a transition period for hardware sales,** but Apple's performance fell short of analysts' expectations, both in terms of overall revenue and breakdown into specific product businesses, and this is the fourth consecutive decline in Apple's revenue, which is the same as the consecutive decline in 2001. **

Under the trend of weak overall demand for consumer electronics, Apple has been trying to get rid of the slowdown in sales, but judging from the current situation, it is more challenging and difficult for Apple to climb over the hurdles and continue to maintain the status of "machine king".

01 Chinese market that can't be sold

One of the key reasons for Apple's struggle is the sluggish demand in China.

Judging from the performance of this quarter's financial report, Apple's revenue in Greater China fell by 2.5% year-on-year, which was still a positive growth trend in the previous quarter, of which iPhone was the only category among all hardware products to achieve revenue growth. "The decline in sales in China is frustrating, which may be due to weak consumer spending," one analyst said. ”

According to data from analyst agency Counterpoint, in Q3 2023, China's smartphone sales fell by 3% year-on-year, and although Apple outperformed the market, its market share was not optimistic.

From the perspective of market ranking, in Q3 2023, Apple's performance is not satisfactory, its sales have fallen by double digits, while Huawei, Honor, and Xiaomi have all achieved positive growth.

Image source: Counterpoint

The reason for Apple's loss is multiplicity. On the one hand, the internal friction of Apple's internal models has not kept up with the rhythm of the Chinese market in terms of promotion and price strategy. On the other hand, it is Huawei's "raid". Huawei's sudden launch of the Mate 60 Pro at the end of August caused a sensation in the market, making a huge contribution to its 37% year-on-year increase in smartphone sales in Q3 2023.

**It is worth mentioning that shortly before the earnings release, Apple unveiled its M3 series chips, and although it received some "far ahead" reviews, it did not seem to impress Chinese consumers. **

Corroborating data comes from Qualcomm, which has previously said that its smartphone chip business has seen a 35% increase from Chinese Android phone makers, suggesting that Chinese consumers are opting for non-iPhone phones in large numbers.

Apple is trying to ramp up promotions to deal with more competition with price advantages. **The "Silicon-based Research Laboratory" found that during the Double 11 period, the price of all models of Apple's iPhone 15 collapsed on the e-commerce platform, with a maximum price reduction of nearly 1,000 yuan, and there was almost no premium. **

However, this does not mean that domestic brands have not played a more fierce "price reduction card", and "price for volume" is a common play method used by domestic mobile phone brands in the past Double 11. Taking Xiaomi as an example, the "Silicon-based Lab" observed that according to Xiaomi's battle report, during the Double 11 sales period, the first sales of the Xiaomi 14 series have reached 6 times the total sales of the Xiaomi 13 series.

As for Huawei, this promotion focuses on the old models, and the new models are still in short supply. A clerk at Huawei's offline store told the "Silicon-based Research Laboratory" :"The supply of new models such as the Mate 60 Pro is small, and the market is still at a premium. ”

Cook said at the earnings analysis meeting that Apple's quarterly revenue in China still hit a record despite concerns, but it did not boost investor confidence. For Apple, the cold of new models and the intensification of the external competitive environment may make life in the Chinese market even more difficult.

02 Is the next story AI or Vision Pro?

Another question to keep an eye on is, apart from smart hardware, what exactly will be Apple's next phase of new story?

In the eyes of most researchers, one is Apple's investment in generative AI, and the other is Vision Pro, which carries Apple's "spatial computing" ambitions. **

In the earnings analysis session, Cook said that Apple is investing "quite a bit" in generative AI. "Over time, you'll see advancements in the product, and these technologies are at the heart of the product," he said. According to a previous Bloomberg report, Apple is actively exploring how to implement AI into its products, and plans to invest about $1 billion a year in this business.

In the article "Apple's AI Ambitions: Internal Friction, Counterattacks and Challenges", we detailed Apple's AI strategy, which distinguishes it from other tech giants, Apple's ambition is: **Under the strategy of "vertical integration" and "combination of software and hardware", make "AI ubiquitous" and integrate generative AI into its own ecology and applications. For example, smarter Siri, etc., or smarter hardware devices. **

In addition, the debate within Apple about generative AI is how exactly to deploy generative AI. At present, there are three ways to deploy generative AI: device-side, cloud-side, or a compromise solution between "device-cloud synergy". According to Bloomberg's Mark Gurman, Apple is likely to take a comprehensive approach, or a compromise: some features will be handled locally on the device, while some more advanced tasks will be handled in the cloud.

Apple's cautious approach to generative AI is not destined to provide much meaningful information, but its capital expenditures are indicative of Apple's progress in this area. Tianfeng Securities analyst Ming-Chi Kuo has estimated that Apple will purchase 2,000-3,000 AI servers in 2023 and 18,000-20,000 AI servers in 2024. **

Another big attraction is the Vision Pro, but Cook didn't announce specific details such as a presale date or marketing strategy. Previously, the Vision Pro was not considered a mass-market consumer electronics product due to its high pricing, but it was previously revealed that Apple was developing a cheap version of the Vision Pro.

Whether the Vision Pro can lead Apple's continued leadership is an unanswered question for the time being, but Xiaozha next door has quietly lowered its shipment forecast for the Quest 3 headset in Q4 2023 by as much as 5-10%. According to Ming-Chi Kuo's latest research brief, shipments in the first quarter of next year will see a huge sequential decline of 70-80%.

Although the positioning of the two products is not the same, it is certain that it is getting harder and harder for Apple to get more money out of consumers' pockets.

Resources:

Mark Gurman ：Apple Warns of Sluggish Holiday Quarter After China Slowdown