Shares of AAPL traded up 6% following earnings on a positive outlook for the second half of CY24. Investors were relieved at the the guidance for and what it implied for improving growth for the rest of the year along with a more favorable outlook for China growth.

In March, revenue was down 4% y/y, but backing out the one-time benefit received last year, it would’ve been flat. On top of that, revenue is expected to grow 2% in Jun-24, 4% in Sep-24, and 6% in Dec-24. Investors are optimistic about the back half of this year as we anticipate a re-acceleration of revenue.

March segment recap:

iPhone: sales were down 10.5% and the Street was looking for a 10% decline. iPhone sales were up 6% in Dec-23 and up 3% in Sep-23. Our take: backing out the $5B one time revenue benefit Apple received in March of 2023 related to the iPhone production shut down in December of 2022, iPhone sales would’ve been flat y/y. This means despite the headwinds (weak upgrade cycle, China, macro), the results were pretty good.

iPad: sales were down 17% and the Street was looking for a 11% decline. iPad sales were down 25% in Dec-23 and down 10% in Sep-23. Our take: Expect iPad sales to rebound as new models will be announced. Overall, we see the iPad segment growing at an average of low single digits.

Mac: sales were up 4% and the Street was looking for a 4% decline. Mac sales were up 1% in Dec-23 and down 34% in Sep-23. Our take: The new Macbook Airs drove the Mac installed base to reach an all-time high as half of the MacBook Air buyers during the quarter were new to Mac.

Wearables: sales were down 10%% and the Street was looking for a 11% decline. Wearables sales were down 11% in Dec-23 and down 3% in Sep-23. Our take: This is a soft number despite getting the benefit of Vision Pro release. Excluding the impact of Vision Pro, we estimate the segment would’ve been down 17%.

Services:  Services grew 14% to a record high. Guidance was strong, expecting a similar rate of growth. Our Take: The company is not seeing signs of the EU changes impacting the Services business and healthy growth is continuing. AI has the opportunity to boost this if plans are to charge subscriptions for AI, more to come in June.

As expected, the true AI announcements will come in June at WWDC. However, Cook did say they are making “significant” investments in AI and believe they have advantages in AI around their hardware, software, and services approach.

What is noteworthy is he mentioned their approach to privacy will benefit their AI products, which I agree with. Cook is laying the groundwork for Apple to release personalized or agent based AI products.

Long-term (2025 and beyond), the buildout of AI will have two positive impacts on revenue growth long-term. First, generative AI will be built into iOS and MacOS, allowing new features around text, image, and task automation, which will help sell hardware. Second, the company will likely begin building agent-based AI, which can automate more complex tasks and be sold as a subscription business.

Separately, the company hinted that they will do a deal with a third party AI foundation model, likely Google or OpenAI, to power AI within Apple’s products. I expect an announcement in June.

Greater China revenue was down 8% y/y, better than whisper numbers of down 12%. As a point of reference, Greater China revenue was down 13% in Dec-23 and 2% in Sep-23. In other words, we saw an improvement in growth in China despite all of the concerns throughout the quarter.

More importantly, they gave further details on their call about trends within Greater China. Cook mentioned, “iPhone within Mainland China grew on a reported basis.” While he did not specify if it was revenue or unit growth, I now believe he was referring to units.

If units in were up 1% y/y and there was an average price cut of 5%, that would trigger a sequential improvement in iPhone sales. This nets out to my belief that iPhone revenue in Mainland China was down 5% y/y last quarter. This lines up with Cook’s comments that, “the primary driver of the acceleration was iPhone.” The “acceleration” that Cook is referring to is Greater China revenue was down 8% y/y in Mar-24 versus down 13% in Dec-23.

This further tells us that the non-iPhone business in Mainland China (Services, Mac, iPad, Wearables) was down about 12% y/y in Mar-24. As a point of reference, Apple reported globally these segments were up 4% y/y in Mar-24.

My best guess for this delta is the non-iPhone business hit the wall in the March quarter because of the China marco factors that have softened consumer “disposable” spending. The iPhone was able to hold its ground given phones fall under a consumer’s “necessary” spending.

It’s clear Apple is not shying away from Vision Pro. Tim Cook’s 3rd comment on the earnings call was about the launch of Vision Pro. More than half of the Fortune 100 companies are testing Vision Pro and exploring use cases, including aircraft engine maintenance training to immersive kitchen design.

While there is development progress at the enterprise, it’s clear consumer use case has yet to emerge, limited today to spatial memories and entertainment.

As I’ve written about before, Vision Pro Will Be a Hit—Once the Apps Show Up. I still believe the Vision segment would account for about 15% of total Apple sales in 2030, or about $74B. I believe the average price will decline to $1,200 (from $3,500 today), and by 2030 the company will sell about 60m units. This estimate is based on assuming Apple grows its top line by an average of 5% per year through the end of the decade, totaling $550B.

While I expected Apple to warn investors that Capex spending would materially increase in 2024 as the company ramped investments in AI, the company instead suggested there would be little change in Capex spending. Giving the expected 50-90% increase in infrastructure spending from Meta, Microsoft and Google this year, Apple’s comments left investors puzzled at how the company can become a leader in AI and limit spending at the same time.

CFO Luca Maestri commented that when it comes to building AI infrastructure Apple will take the same two pronged approach they use with suppliers today; Sometimes they invest directly and other times they partner with third parties. When it comes to AI, my interpretation of “third parties” is licensing Google or OpenAI’s foundation model. This move would dramatically reduce what Apple will need to spend to get into the AI game. While Apple gains speed to market for its AI products by going the partnership route, the company loses some control of how they can use AI over the long-term because they don’t own the underlying model. Because of that long-term risk, I believe Apple will eventually build their own foundation model.

As for the next couple of years, the bottom line is that Apple’s partnership approach reduces the chances that we have a “gotcha” Capex moment as Apple builds out their AI infrastructure.

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