On May 1, $Apple(AAPL)$ released its financial results for the second fiscal quarter ended March 2025.
The company’s overall performance slightly exceeded market expectations, with core business lines remaining resilient. However, as prior investor concerns were validated, Apple’s share price fell by over 4% in after-hours trading.
Both revenue and earnings surpassed consensus forecasts this quarter. The Services segment once again set a new record and significantly contributed to margin expansion. Performance in the Greater China region slightly outpaced earlier conservative expectations.
Nonetheless, Apple faces multiple challenges, including a potential $900 million increase in tariff-related costs in Q3, persistent demand pressures in China, and broader supply chain uncertainties.
Forward guidance was cautious, with Q3 revenue growth projected in the low- to mid-single digits, and gross margin guidance in the range of 45.5% to 46.5%.
Development progress on Apple Intelligence features has lagged behind the original schedule. The company acknowledged that its pace in the AI space is more restrained and deliberate compared to peers.
Regulatory and legal risks remain, representing a key source of external uncertainty for the company.
Notably, Apple, a company with robust free cash flow, returned $3.8 billion in dividends and repurchased $25 billion in stock during the quarter. It also authorized an additional $100 billion share repurchase program.
Apple currently trades at a forward FY2025 P/E ratio of approximately 29x, down 20% from previous highs, yet still above its five-year historical average.
Earnings Overview and Market Response
Apple posted total revenue of $95.4 billion for the quarter, up 5% year-over-year, exceeding the consensus estimate of $94.68 billion. Earnings per share came in at $1.65, up 8% YoY and slightly above the expected $1.63. Net income reached $24.8 billion, while operating cash flow remained strong at $24 billion.
Performance by major business segment:
iPhone: Revenue of $46.84 billion, up 2% YoY, slightly above expectations; accounted for approximately 49.1% of total revenue.
Mac: Revenue of $7.95 billion, up 6.6% YoY, exceeding estimates.
iPad: Revenue of $6.4 billion, up 15% YoY, a notable outperformance.
Wearables, Home, and Accessories: Revenue of $7.52 billion, down 4.9% YoY.
Services: Revenue of $26.64 billion, up 11.6% YoY, a new record, increasing its contribution to 27.9% of total revenue.
Despite resilient fundamentals, Apple’s share price fell nearly 4% post-earnings, largely due to the subdued Q3 revenue growth forecast (0%–5%) and ongoing investor concerns about U.S.-China trade tensions, geopolitical risks, and softening consumer demand in China.
The company also announced a 4% increase in its quarterly dividend to $0.26 per share and approved a new $100 billion share buyback authorization, underscoring its commitment to enhanced shareholder returns.
Investment Insights
Stable Demand Profile, but Growth Quality Under Scrutiny
iPhone revenue remained steady, supported by the launch of the iPhone 16e and some demand pulled forward due to anticipated tariff adjustments. No signs of inventory buildup or early upgrade exhaustion were observed in the channel.
Mac and iPad segments also performed well, delivering $7.95 billion and $6.4 billion in revenue, respectively. This reflects Apple’s advantage in hardware diversification and the stickiness of its ecosystem. Management emphasized record-high active device count and customer satisfaction, which support long-term growth.
Revenue for Wearables, Home, and Accessories came in at $7.52 billion, down 4.9% YoY. As AirPods and Apple Watch failed to receive tariff exemptions, Apple provisioned $900 million in related costs, indicating ongoing margin pressure for this segment.
Software and Services: High Margin Anchor with Slowing Growth Momentum
Services revenue reached $26.6 billion this quarter—broadly in line with expectations—marking an all-time high. Gross margin for the segment stood at 75.7%. Services now account for approximately 28% of total revenue and nearly 45% of gross profit, underscoring their central role in Apple’s earnings structure.
However, services growth has slowed to 11.9%, affected by a high base in the prior year. Despite ecosystem stickiness, the deceleration trend warrants attention.
In addition, the segment faces legal and regulatory headwinds. Antitrust investigations into the App Store and ongoing litigation—along with the U.S. Department of Justice’s case against Google—may have spillover effects and introduce uncertainty for Apple’s digital services strategy.
Supply Chain Shifts and Geopolitical Risks
Revenue from Greater China was $16 billion this quarter, below the expected $16.8 billion. The gap is even wider when measured in RMB. However, the market had largely priced in weakened Chinese demand.
High U.S. tariffs and shifting trade policies continue to pose risks to Apple’s supply chain cost structure.
The company reported relatively stable demand in India, Brazil, and Europe, indicating decent consumer resilience outside China.
Although Q2 tariffs had limited cost impact, Apple expects Q3 to incur approximately $900 million in additional tariff costs, largely from the latest round targeting exports from China. In response, Apple is accelerating global capacity diversification:
Approximately half of iPhones for the U.S. market are now produced in India.
Mac and iPad production is gradually shifting to Vietnam.
While this strategy reduces reliance on China, manufacturing costs in India and Vietnam are generally 5%–8% higher, which may compress margins going forward. These impacts have been reflected in the updated gross margin guidance.
AI Strategy and Apple Intelligence Progress
CEO Tim Cook stated that Apple has made some progress on smart Siri and related personalized features. Development of "Apple Intelligence," announced at WWDC 2024, is underway, though slightly behind schedule.
Initial data suggests that iPhone sales in markets with Apple Intelligence features are outperforming those without, indicating positive early traction.
Management acknowledged Apple’s relatively cautious approach to AI compared to its peers, but emphasized that the company prioritizes user experience and ecosystem integration over rapid AI product launches.
Capital Returns and Valuation
Apple generated $24 billion in operating cash flow in Q2, maintaining a robust financial position. The company raised its quarterly dividend to $0.26 per share, continuing its stable payout policy.
Additionally, the newly authorized $100 billion buyback plan highlights Apple’s strong shareholder return commitment.
The company’s forward FY2025 P/E ratio stands at approximately 29x. Although this reflects a 20% pullback from prior peaks, it remains above the historical five-year average, suggesting that valuation remains elevated.
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