Apple's Q1 2023 report may not seem impressive at first glance, but a closer look reveals a company that performed exceptionally well considering the challenges it faced, such as supply disruptions, unfavorable foreign exchange rates, and macroeconomic conditions. The most noteworthy aspect is the phenomenal growth of the Apple ecosystem, with the installed base reaching 2 billion devices and increasing engagement on its services. Importantly, Apple generates substantial free cash flow, which it returns to shareholders through buybacks and dividends.
February 3, 2023
Apple (NASDAQ: AAPL) reported revenue of $117.2 billion, down 5% year-over-year for the first quarter of fiscal 2023. With the topline going backward, operating income came in at $36 billion, down 13.2% year-over-year, and free cash flow was $30.2 billion versus $44.2 billion a year ago. It is also important to note that this quarter was 14 weeks long, not 13 weeks, so the year-over-year comparisons would have looked worse without that extra week.
And while the numbers aren’t anything to write home about, the underlying business, however, continues to shine, which was apparent during the earnings call.
First, the company faced a trifecta of headwinds during the reporting period. Currency was an 800 basis point headwind. Then, the Covid-19-related lockdowns in China stifled the company’s ability to meet iPhone Pro demand.
CEO Tim Cook’s response to an analyst question nicely captured the supply chain-related dynamics that affected this quarter:
“The Pro has been a — the 14 Pro and the 14 Pro Max have done extremely well up until the point where we had a supply shortage and couldn’t provide them — couldn’t provide the total of the demand. And so it’s definitely a strong Pro cycle.”
Of course, there are ongoing macroeconomic challenges. However, Apple CEO Tim Cook suggested that macro primarily impacted the company’s Mac and Wearables business, with iPhone and Services being less affected.
Apple also announced that they have 2 billion active devices, which has doubled in 7 years. Further, while the quarter was challenging, management noted that the “installed base of active devices grew double digits and achieved all-time records in each geographic segment and in each major product category.” In other words, Apple’s ecosystem continues to bloom, and while this quarter might not have been great, the foundation for delivering for years to come remains intact and is becoming a fortress with each passing year.
Part of the success of growing the install base comes from paying attention to emerging markets. The company saw a record Android to iOS switcher in India and Mexico this quarter. Apple also set all-time revenue records in Indonesia, Mexico, Turkey, and Vietnam and quarterly records in Brazil and India.
Then there’s Apple’s Services business, which “whisper” numbers suggested would decline due to falling App Store engagement. Tim Cook made it a point to note how the App Store performed in his prepared remarks:
“We achieved double-digit revenue growth from App Store subscriptions and set all-time revenue records across a number of categories, including cloud and payment services. All told, Apple now has more than 935 million paid subscriptions.”
CFO Luca Maestri provided more color, noting that they set “all-time revenue records for cloud services, payment services and music and December quarter records for the App Store and AppleCare.”
Overall, it was clear that Apple’s quarter would have been better sans the iPhone 14 Pro supply issue. We know that the supply issues are now behind the company, and some foreign exchange headwinds are also abating. And while the macroeconomic environment remains challenging, we are set up for a good second quarter. Most importantly, Apple has never been in a stronger position than it is today as far as the business’s long-term health is concerned.
The company ended the quarter with $165 billion in cash and equivalents and debt of $111 billion. Apple is generating plenty of free cash flow and is still some distance away from its stated goal of being cash neutral. In the meantime, shareholders can enjoy rising dividends and share repurchases while the company executes towards strengthening existing products and services, introducing new ones, and expanding upon its already large installed base.
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