Beware the tariffs! Inside Apple’s latest financial results
Things are weird in Apple-land. Legal judgments are piling up in unexpectedly bad ways. Tariffs threaten large parts of Apple’s business. This year’s banner Apple Intelligence features got delayed indefinitely.
I did have to laugh when I got to the end of The Verge’s piece about this Thursday morning, a few hours before Apple reported its latest quarterly financial results. “Look,” wrote deputy editor Todd Haselton, “I’m not saying Apple’s dead in the water here.”
Well, that’s good, Todd. Probably not a thing you should say.
In related news, Apple just put nearly $24 billion in profit into its piggy bank over the last three months.
The water is many things. It’s choppy. It’s chilly. There may be blood in it. There might even be sharks swarming. You pick the water metaphors you want, but what Apple’s certainly not is dead in it.
Let’s look at the highlights of the quarterly disclosures and obligatory analyst phone call.
By the numbers
This quarter was pretty usual for Apple, at least in terms of where the company has settled after the immediate effects of the pandemic. Overall revenue was up 5% versus the year-ago quarter, which is pretty much what it’s been for the last four quarters.
The Mac had another good quarter, up 7%, no doubt helped in part by the new M4 MacBook Air, which was on sale the last couple of weeks of the quarter.
And look at the iPad, up 15% and with four straight quarters of decent growth after being down nine of the 10 previous quarters. We’ll see if the iPad can keep it up, but it’s got momentum again after two years in the doldrums.
Speaking of doldrums: iPhone revenue was up 2%, and that qualifies as good news, given that it was down one percent last quarter. But the truth is that iPhone revenue has been essentially flat for the last three years. Not since fiscal 2021 has there been multiple quarters of double-digit growth. To be sure, the iPhone is still a money machine—it’s generated $200 billion in revenue while spending the last year in the doldrums. But if you’re a growth-obsessed investor, it’s a little troubling.
Apple’s motor of revenue growth, Services, continues to perform well in its post-inflationary period. For a while, Services was growing explosively, but it’s been kicking around 10% growth for the last three years, and this quarter’s 12% growth is right in line with that. Over the last six quarters, the growth has been exactly between 11% and 14%. It’s not bad, especially when you consider that it’s got a 75% profit margin.
Now to the ugly dog of the quarterly numbers, Wearables, Home, and Accessories. The category, once a fantastic mover, has fallen on hard times. The 5% drop year-over-year is in line with its last seven quarters, all of which showed revenue drops, and to be fair, it’s been looking bad 11 of the last 12. Apple claimed that the Apple Watch reached an all-time high in its installed base, which is great, and new AirPods probably helped a bit, but it feels like this category is seeking a major product release, and it’s probably AirPods Pro 3 or bust.
Kudos to Apple CFO Kevin Parekh for claiming that it was a tough compare for the category: “We did face a more difficult compare against the launch of the Apple Vision Pro in the year-ago quarter, as well as the Watch Ultra 2 launch last year,” Parekh said.
I can’t report if he said this with a straight face or not, because the conference call is audio only. And I suppose that technically, if Apple sold 115,000 Vision Pros during last year’s second quarter and none this quarter, that would account for the $400 million drop-off. Blaming it on sales of the Apple Watch Ultra 2, which had been out since the previous fall, also seems like a stretch. And it doesn’t change the fact that last year’s “difficult compare” was itself down 10 percent from the previous year-ago quarter. (Which was itself down 1% from the previous previous year-ago quarter.) I guess it’s turtles all the way down or something.
Tariffs not terrific
The topic of the day on the call with analysts was, as you might expect, how a tariff-powered global trade war might affect a company that depends on one of the world’s most internationally dispersed supply chains. Perhaps the most shocking moment of the call was when analyst Richard Kramer of Arete Research started his question by declaring, “I won’t ask about tariffs.”1
Now, if you want to ascribe Apple’s strong product sales numbers to people rushing to buy products in advance of tariffs kicking in, you probably can’t. This year’s second fiscal quarter ended March 29, and it wasn’t really until the weekend of April 5 that Apple Stores really saw major increases in sales due to tariff fears, at least according to my retail sources.
Cook backed that up, too: “If you look at the March quarter, we don’t believe that we saw obvious evidence of a significant pull forward in demand in the March quarter due to tariffs,” he said. But what he did say is that Apple “did build ahead inventory” for the following quarter—in other words, it built more products in advance, ahead of demand, so it could ship them into the U.S. before the tariffs took effect. Those sales will all be accounted for during the third fiscal quarter.
Another way Apple can reduce the impact of tariffs is by changing which global factories it uses to build products destined for the U.S. market. “For the June quarter, we do expect the majority of iPhones sold in the U.S. will have India as their country of origin,” Cook said, “and Vietnam to be the country of origin for almost all iPad, Mac, Apple Watch, and AirPods products also sold in the U.S.” He said that if you’re outside of the U.S., you’re most likely to be buying products made in China.
Cook also commented briefly on Apple’s philosophy in dealing with the issues of trade wars between various countries: “Obviously, we’re very engaged on the tariff discussions,” he said. “We believe in engagement and will continue to engage.” Elizabeth Warren take note, I guess.
Apple also put a number on how much it will be affected by tariffs during its next fiscal quarter: $900 million. Yes, that’s nearly a billion dollars, but when you consider that Apple just generated $95.4 billion in revenue and that it’s expecting to grow from the $85.8 billion it generated during last year’s third quarter, a $0.9 billion step back doesn’t seem like a massive amount. The company also said it would probably lose a couple of points of gross margin as part of the deal.
Beyond June, though, nobody’s willing to make any predictions. Cook said: “For our part, we will manage the company the way we always have, with thoughtful and deliberate decisions, with a focus on investing for the long term, and with dedication to innovation and the possibilities it creates.”
The part where they tout U.S. investment
As you might expect, given the current political climate, Cook spent quite a bit of time recapping the company’s February announcement that it’s spending more than $500 billion in the United States in the next four years. Twice, Cook listed the key states that are a part of this endeavor: Michigan, Texas, California, Arizona, Nevada, Iowa, Oregon, North Carolina, and Washington, plus an advanced server manufacturing facility in Texas.
There were some more interesting details. Cook said that Apple expects to source “more than 19 billion chips from a dozen states, including tens of millions of advanced chips being made in Arizona this year.” That’s TSMC’s project in Arizona, which will generate systems-on-a-chip for Apple. According to Cook, Apple is “the largest and first customer getting product out of that.”
Step right up and greet the bar
Credit to that brave analyst, Richard Kramer, who didn’t bother asking a ninth question about tariffs, but instead asked Cook head-on about the fact that Apple had failed to live up to its promise of shipping a more personalized Siri as a part of Apple Intelligence.
Cook talked about it, but not before listing—twice!—all the Apple Intelligence features that did ship. (For the record: “Since we launched iOS 18, we’ve released a number of Apple Intelligence features from helpful Writing Tools to Genmoji, Image Playground, Image Wand, Clean Up, Visual Intelligence, and a seamless connection to ChatGPT. We made it possible for users to create movies of their memories with a simple prompt and added AI-powered photo search, Smart Replies, priority notifications, summaries for mail, messages, and more. We’ve also expanded these capabilities to more languages and regions.”)
Anyway, the official word from Cook himself about why the personalized features were delayed is this: “We need more time to complete our work on these features so they meet our high-quality bar. We are making progress, and we look forward to getting these features into customers’ hands.”
So, there’s an implied promise that these features are coming, but that they were delayed because the results weren’t good enough. Tell your friends when they ask you about it on Friday night down at your local high-quality bar.
Under the Gavel with Tim Cook!
Kramer, who is going to get an analyst gold star for this, also asked Cook about the various court cases that might really impact Apple’s business. Regarding yesterday’s court ruling in the Epic case, Cook said, “We strongly disagree with [it]… We’ve complied with the court’s order, and we’re gonna appeal.” He declined to discuss Google’s case and the potential loss of search-engine referral revenue altogether.
But, and I think this is important, Cook did not wave off the suggestion that these were serious issues. “We’re monitoring these closely, but as you point out, there’s risk associated with them, and the outcome is unclear.”
The outcome is unclear about a lot of things these days, Tim. But in the meantime, Apple’s just going to keep throwing off a couple of dozen billion in profit.
- He asked about Apple Intelligence failures instead—womp womp. ↩
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