Apple Earnings Call Takeaways: Emerging Market Strength, Guarded AI Approach, Muted Q3 Guidance And More

Apple, Inc. AAPL reported forecast-beating results for the fiscal year second quarter, thanks to stronger-than-expected iPhone sales and record Services segment revenue.

Following the earnings release, CEO Tim Cook and CFO Luca Maestri delved into the results and outlook and fielded analysts' questions on the earnings call.

Here are the key takeaways:

Emerging Market Shines: Performance in emerging markets from South Asia to India to Latin America to the Middle East was strong, Maestri said on the call. The "rest of the Asia-Pacific" region saw 15.3% year-over-year revenue growth, outperforming the rest of the geographies.

Worldwide iPhone revenue rose 2% year-over-year to $51.3 billion, a March quarter record, due to March quarter record performance in several developed and emerging markets such as India, Indonesia, Turkey and the UAE.

Despite the currency headwinds, the quarter was a great one for emerging markets, CEO Cook said. "We’re putting efforts in a number of these markets and really see, particularly given our low share and the dynamics of the demographics etc., a great opportunity for us and in those markets," he added.

India At Tipping Point: While noting that India saw double-digit year-over-year growth, Cook said the country is an incredibly exciting market. "There are a lot of people coming into the middle class and I really feel that India is at a tipping point," he said.

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Forex Remains A Headwind: The March quarter saw a 500-basis-point forex headwind, Cook said. This along with macroeconomic challenges led to the 3% year-over-year revenue drop. On a constant currency basis, revenue was higher year-over-year.

Record Installed Base: Installed base of active devices grew to a new record, thanks to a higher level of customer satisfaction and loyalty.

Mac, iPad Softness – Function Of Tough Comps: Cook said Mac and iPad revenues were in line with expectations. The year-over-year drop for both categories was due to a tough comparison with a year ago, which saw Apple roll out M1 chips throughout the Mac lineup and M1-powered iPad Air. iPad revenue also took a hit from forex headwinds and macroeconomic challenges.

Services – Crowning Glory: Services revenue came in at an all-time high of $20.9 billion, with record performances across App Store, Apple Music, iCloud and payment services. The business has now more than 975 million paid subscriptions, up 150 million over the past year. The company noted record Services revenue in the Greater China region that comprises mainland China, Taiwan, Hong Kong and Macau. The rest of the geographies saw a March quarter record.

Services Boost Gross Margin: The 130 basis-point gross margin expansion from the previous quarter was due to a favorable mix shift towards services partially offset by leverage. The product gross margin fell 30 basis points sequentially to 36.7%, while the Services margin rose 20 basis points to 71%.

Macro Hurts Wearables, Home & Accessories: Wearables, Home and Accessories revenue was $8.8 billion, down 1% year over year, with the macroeconomic environment serving as a drag. The U.S. and Greater China, however, saw record March performance for the segment. The Apple Watch installed base set a new all-time record.

June quarter Outlook: Maestri guided year-over-year June quarter revenue performance to be similar to that of the March quarter. This translates to revenue of $80.51 billion, below the consensus estimate of $84.71 billion. The company expects nearly 400 basis points of negative forex impact for the June quarter.

The company expects the Services business to see the same growth as in the March quarter.

Gross margin is expected at 44-44.5%.

AI Focus: On AI, Cook said it is very important to be deliberate and thoughtful in how one approaches these things and that there are a number of issues that need to be sorted.

The Apple CEO, however, conceded that the potential is certainly very interesting. The company has made enormous progress integrating AI machine learning throughout its ecosystem, weaving it into products and features for many years, he said.

"We view AI as huge and you know we’ll continue weaving it in our products on a very thoughtful basis," he added.

Green Initiatives: Apple's manufacturing partners support over 13 gigawatts of renewable energy, translating to 17.4 million metric tons of avoided carbon emissions, equivalent to removing nearly 3.8 million cars from the road. The company is investing an additional $200 million in restore fund meant to support scalable nature-based carbon removal projects.

Price Action: In after-hours trading on Thursday, Apple stock rose 2.18% to $169.40, according to Benzinga Pro data.

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