Apple's (AAPL) third quarter results beat analyst estimates on both the top and bottom lines. Earnings of $1.26 was better than the $1.20 estimate, while revenue of $81.80 billion topped the estimate of $81.55 billion. However, iPhone and iPad sales did fall short of Wall Street expectations. Constellation Research Founder Ray Wang and Technalysis Research President and Chief Analyst Bob O’Donnell joined Yahoo Finance Live to discuss the report. O'Donnell says the results were "not bad" considering the overall decline in smartphone sales. Wang agreed, calling the report "much better than expected."
As Wang points out, what is key for Apple is "how much many they can make per device. It's not about total iPhone sales. And what they were able to show is that services that services is continuing to grow and the non-iPhone sales around wearables is also picking up. Those two are complimentary."
When it comes to its international business, Apple has been focusing a lot on India. O'Donnell says "it is going to be incredibly important" to Apple down the line. However, there will be a couple of challenges for Apple in the country too. First, he says "we haven't see as many premium phones, in general, sell there," though he says Apple does have some older models it could sell there. O'Donnell's second point is that "I think we are going to see some slower attach to services there," noting that services are not used to the degree they are in other markets. On the plus side though, O'Donnell says Apple has "almost no install base in India, it's extraordinarily small. So, the great thing is, it's almost nothing but upside for them there."
AKIKO FUJITA: We are watching shares of Apple trading just a little lower, down about half a percentage here on the back of their earnings results. The company posting a third straight quarter of declines in terms of revenues. Earnings coming in at $1.26. Estimate was $1.21 a share. Revenue beating expectations, coming in at $81.8 billion versus the estimate of $81.56 billion.
Let's try to break down some of the categories for the company. IPhone, certainly, a big one that investors are watching. That revenue was a miss coming in at $39.67 billion. The expectation was 39.79. Services beating here. Their revenue at $21.21 billion versus the $20.7 billion that was expected.
We are also seeing iPad revenue amiss. And then the wearables space, that was a beat there at $8.28 billion versus 8 point-- actually, yeah, $8.38 billion that was expected. One of the markets we like to watch very closely, Greater China. That revenue coming in much stronger than expected at $15.7 billion there.
Joining us now is Bob O'Donnell, Technalysis Research president and chief analyst, and Ray Wang, Constellation Research principal analyst, founder. Good to have both of you on. Bob, let's start with you. Because, you know, you look at iPhone revenue being there amiss. But this is something that every smartphone company out there has had to struggle with in terms of declining demand. What do you make of the numbers coming out from Apple?
BOB O'DONNELL: You know what? Actually, they're not bad. I mean, all things considered, there was a big expectation that the numbers would drop a fair bit this quarter because, as you pointed out, there's a huge drop in smartphone shipments across the Android ecosystem. You know, Qualcomm had a bit of a-- they did reasonably well. They-- guidance, but it was still lower. And they power a lot of the Android ecosystem. Of course, they still supply modems to Apple as well.
But, you know, I think all things considered, as you pointed out there at the end, Akiko, the China numbers are better than people expected. And, of course, once again, it's services that kicks in and really makes up the difference for Apple. And that's what I think a lot of people were hoping for. As long as those iPhone numbers were close-- and clearly, they were. They were off but not terribly. You knew the services could kick in and fill in the rest.
AKIKO FUJITA: Right, let me pick up on that point that Bob just made there in terms of, you know, this not being as bad. Obviously, a lot riding on what's about to come for Apple with that September event and the iPhone 15. How do you look at the numbers today in the context of what is traditionally a weaker quarter for the company?
RAY WANG: You know, Bob's absolutely right. This is much better than expected. But the most important thing, really, is the active number users, active devices that they have. This is all about how much money they can make per device. It's not about total iPhone sales.
And what they were able to show is that services are continuing to grow. And the non-iPhone sales around wearables is also picking up. Those two are complementary. And when you think about what the average spend per user is, that number is continually gone up over the last 24 quarters. And that's really because of their ability to actually expand iPhone and expand services growth.
Those two things have actually made up to be the better part of the story. And by the time we get to a September event, right, those sales will then hit into the next cycle and to the next year. So that's actually good news for a lot of investors.
But more importantly, it's good to see that on the high end, we're still seeing growth. China has recovered. And, of course, we've yet to see what happens with the India numbers. I'm not sure the breakouts are in there, so.
- Yeah, I didn't see the breakout so far in there, Ray. And I want to pose this question to you because, for instance, on their last earnings call, Tim talked about that a lot, about the opportunity in India. What are you looking to hear on the call when it comes to the India market?
RAY WANG: Yeah, I'm hoping someone asks the question about, hey, have they seen gains in India now that they've put three flagship retail store operations in there? There's plans to do manufacturing in India. And I think that's going to be a long-term winner for Apple over the next three to four quarters. That's something people are going to watch for those volumes. And then, of course, thinking about what else is coming out of India in terms of the services growth that will be the attach rate to what's actually happening with the devices.
AKIKO FUJITA: Bob, let's pick up on that point about India because I feel like we've been talking about the potential of India for many, many years now.
BOB O'DONNELL: Yes.
AKIKO FUJITA: It does certainly feel like Apple has been planting their roots. They're starting to see some of that take shape. But how do you think investors should be looking at that market where it is right now in the context of China and some of the headwinds that a lot of companies like Apple are facing there?
BOB O'DONNELL: Well, I mean, look, it is going to be incredibly important. I think there's going to be a couple of unique challenges to India. First of all, of course, we haven't seen as many premium phones in general sell there. It's much been more on the lower end.
Now, Apple does have a bunch of lower cost, older versions of iPhone products. You know, and to Ray's point, it's once you get an iPhone, then you get attached to the services. Now, the other concern, though, with India is I think we're going to see some slower attach to services there because it's very much more of a hardware-focused market. Obviously, they use services but I don't think to the degree that we've seen in some of the other markets.
So I think India is going to be interesting. I think it will be different than China. I don't think we can think of it the same way. I think you'll see a little bit lower ASP in terms of the phones that are being purchased there. I think you'll see a little bit of lower attach. But it's still a huge opportunity. And they have almost no installed base in India. It's extraordinarily small. So the great thing is--
RAY WANG: Yeah.
BOB O'DONNELL: --it's almost nothing but upside for them there.
- And Bob, I want to ask you, in terms of both the iPhone 15 and, say, the newest Apple Watch, is that enough to be supportive of Apple's continued strength?
BOB O'DONNELL: Well, yeah. I mean, look, it's going to be-- you're going to-- we're going to see upgrades. It's not going to be probably radical more than likely, right, until Apple does, say, a foldable along the lines of a Samsung or what have you, which I think eventually, they'll do. Maybe a foldable iPad first. But eventually, I think we'll get there.
You know, it tends to be incremental upgrades. I think you'll see that again this year. But it's enough. Remember now, we're not in that phase anymore of everybody upgrading every year. It's a every couple of years.
So most people are going to be upgrading from, say, an iPhone 12 or maybe a 13 or even maybe an 11, right? And so when you make the comparisons between the 11 or 12 versus the 15, they are big. And so that's the important thing to bear in mind in a very mature smartphone market, especially here in the US and a lot of parts of the world where people, you know, are big iPhone fans. That's how they think about it.
So with that in mind, I think they'll do just fine. They'll have enough things there to keep it interesting. And that will continue to drive the market forward.
AKIKO FUJITA: Yeah, Ray, you know, we got those reports a few weeks ago about Apple potentially sort of keeping the shipments with the iPhone 15 pretty steady to where it was a year ago. 85 million units is what Bloomberg reported. Does Apple have to raise the price on, especially the pro level to keep this revenue and this cycle going when you consider, to Bob's point, sort of the broader length of an upgrade cycle? What are we talking about now? 4 years?
RAY WANG: Bob's right. We've stretched out the replacement cycle. But we're in a super wave of replacements, right? There's something about 200 million units that could potentially replace. 85 million is a good number for what's going to happen on the high end. But of course, there's stuff in between.
And yes, most people are switching out phones every 2 to 3 years. The services plans are 2 to 3 years when you look at the big carriers in North America and the same thing that's happening in other markets.
So I think that's important. But along the way, right, we're seeing gross margin also go up, right? It's 0.3% versus what was estimated. But I think it's a very important piece. And so you're going to see not only just the additions of an iPhone 15, which actually helps with the launch.
You're going to see additions in terms of updates to the Mac family and the iPad family. You saw there was a 20% year-over-year decrease on the iPad. There's going to be new products along the way that will fill in the gap.
And, you know, the surprise is the wearables. No one expected the wearables to continue to do this well. You know, remember when Apple said they were going to announce a watch, everybody was like, is that going to make a big difference? And it has. And you can see that as they diversified, even though the iPhone is still about 50% of their revenue.
- And Ray, I want to ask you. So services revenue was a beat, right? What does Apple need to be doing more to incorporate what are you looking to hear when it comes to generative AI, considering they were a little late to the party in that respect?
RAY WANG: Well, here's the interesting thing. On one hand, they're a little bit late to the party for marketing AI. But on the other hand, they've been incorporating AI in all their devices for quite some time. They've got AI and chips, which they've been talking about for years. They are able to suggest things, right? Siri's been around for quite some time.
So they're not ahead on AI. They're not behind on AI as people are saying. They're actually ahead on AI because they don't talk about AI saying, hey, here's the shiny object on AI. They say, here's the benefit of what AI can do for you. And I think that's the difference and the nuance you should be listening to or we should be listening to on the earnings call to be able to understand how far along the AI spectrum they are and where is it benefiting users and where it's benefiting them in terms of their network.
AKIKO FUJITA: Yeah, Ray, I feel like you just tapped into your inner Tim Cook in the framing of that AI discussion. But Bob, the last time we talked about this, you highlighted this when the company unveiled its headsets, the Vision Pro. You said, this is great. There could be mass adoption.
But where is the AI play in all of this? How do we look at that, the Vision Pro, where the future is? Obviously, it's not a big revenue driver immediately. But if they don't have that key AI component, what does that look like?
BOB O'DONNELL: Well, a couple of things. So on Vision Pro, look, they've already pulled back even initial estimates. Some people were saying a million. Now, it's down to 400,000. I mean, it's going to take a long time for that category. I think it still has a long way to go to really be the AR sort of product that people want.
But I'll say a couple of things. So Apple-- as Ray said, Apple has been using AI. But they've been using sort of more traditional AI-- machine learning, things like that. What they have been missing is the new generational AI, generative AI stuff. And that's missing.
And yes, Siri's been there. But look, we all made jokes about Siri because it never really worked well. Mind you, nor did Alexa nor did Google Assistant. And you're seeing both those companies, Google and Amazon, saying, we're going to put a foundation model underneath these assistants. And they're finally going to be able to do what we want them to do.
I think you'll see the same thing happen with Siri. But Apple, again, is going to take the Apple approach. They're going to frame it just very nicely. Like you said, I think Ray did a good job of providing the perspective that Tim will probably say.
But when they're ready, they will launch with full force about, you know, generational AI-based stuff. And I think you'll see it in Siri. You'll see it in other places. Right now, they'll probably talk about filtering on the camera and other things that we've seen other companies talk about. But eventually, you're going to see some of those services.
And I think Apple will find clever ways to integrate it. They're always going to be there. They're going to wait till they feel like they've got a unique angle to it. And then they'll pounce. And I think we'll see that sometime in '24.
AKIKO FUJITA: Bob O'Donnell, Ray Wang, great to get both of your perspectives on the back of these numbers. Appreciate the time.