If this is Apple struggling, everything is going to be just fine

Apple’s business has done so well for so long that it’s been a little unusual to watch the company produce financial results that aren’t setting all-time records. But the huge jump in growth Apple made in 2022 has proved to be a bar too high for the company to leap over in 2023, and so Thursday’s report of third-quarter fiscal results were once again down–but down with a huge asterisk. When you make nearly $20 billion in profit in three months, how down can your quarter really be?

The excuses

From a pure revenue standpoint, Apple’s quarter was down 1 percent from the same quarter a year ago. But as Apple’s executives were quick to point out on Thursday, not only is that number lower than either Apple or the Wall Street consensus expected, but it was a decrease linked entirely to unfavorable foreign currency exchange conditions. Apple said that in constant currency in each local market, the company actually grew–but lost four percent of its growth in foreign exchange.

The vagaries of a strong dollar and weaker currencies in other countries aside, Apple also had another entity to blame for its somewhat weak performance: the calendar itself. When you track year-over-year change, sometimes you end up with my favorite bit of financial phraseology, a “tough compare.”

This quarter’s tough compare was the iPad, which… didn’t really have anything new this quarter. But a year ago, the new iPad Air had just come out and was still selling pretty well. That’s enough, according to Apple, to make the iPad’s 20 percent dip in revenue look worse than it is.

Foundry

None of these excuses are weak sauce, exactly. Apple’s a successful, profitable company that is still riding pretty high. But it’s also fair to note that, tough compare or not, this quarter’s iPad sales were the worst in more than three years. Still, a couple of quarters ago was the best iPad quarter of all time, so if you stop focusing on year-over-year numbers and instead look at the four-quarter moving average for iPad sales, it’s about as high as it’s ever been.

Rolling in the profits

You get the sense that Apple executives would much rather crow about setting all-time revenue records and showing growth in all its product categories because those are easy numbers for everyone to understand. But when they aren’t there, the execs dig deep and find different numbers to show that things are still going great.

Let’s start with profit since the Ferengi Rules of Acquisition tell me that’s what it’s all about. Apple’s gross margin was nearly 45 percent, a third-quarter record and one of the highest margins Apple has ever shown. That’s probably in large part because Services, an extremely high-margin portion of Apple’s business, jumped up to represent 26 percent of Apple’s total revenue. (It was yet another record quarter for Services, a category that seems utterly immune to gravity. It just keeps going up.)

But it’s not just services. Apple also has spent the last couple of quarters cutting costs, or as Apple CFO Luca Maestri put it, taking “a deliberate approach in managing our spend.” The result is that while revenue was down by 1 percent, profit went up by more than 2 percent. Apple got a little leaner, relatively speaking, and that money fell straight to the bottom line.

Subscriptions and devices

Apple announced that it passed a major milestone during the third quarter: it’s reached a billion paid subscriptions. That’s a nice round number, but it’s worth noting–and you bet that Maestri did–that three years ago Apple was at half that number, and that total paid subscriptions have increased 15 percent in the last year.

Who’s buying all these subscriptions? Why the installed base of course, the total number of Apple devices in current use. Apple says that number is now two billion and continues to grow since a lot of the company’s sales are to users who are new to the product. For example, almost half of Mac buyers, over half of iPad buyers, and two-thirds of Apple Watch buyers were buying that device for the first time.

That’s all impressive, but the Apple Watch figure jumps out. After all, the Apple Watch requires an iPhone, which means those buyers are people who already owned one Apple product–and decided to buy another. As Maestri put it, “It means that there’s more and more customers that are owning more than the iPhone.”

Sounds simple, but it sends the message that Apple still has a lot of room to grow by selling iPhone users on other Apple products.

Apple

Better luck next time

Apple doesn’t seem to give traditional guidance for the next financial quarter anymore, but the company did warn that we’re due for another quarter just like this one. In part, it’s due to another “tough compare,” as the Mac and iPad will both face double-digit revenue drops compared to the year-ago quarter.

So, another quarter in the doldrums is upon us. But behind that will come a holiday quarter ripe with new iPhone sales, which is usually the cure for what ails Apple. And then there’s this: all these quarters of disappointing revenue growth just lower the bar for next year. 2022 might be a tough compare, but 2023 certainly won’t be.