Apple (AAPL.O) released its fiscal Q2 2025 financial report (ending March 2025) after the US market close on the morning of May 2, 2025, Beijing time. The key points are as follows:

1. Overall Performance: Revenue & Profit, Steady Growth. This quarter, Apple achieved revenue of $95.4 billion, up 5.1% year-on-year, slightly better than market consensus expectations ($94.2 billion). The increase in revenue was mainly driven by growth in iPhone, Mac, iPad, and software services. Apple's gross margin was 47.1%, up 0.5 percentage points year-on-year, in line with market consensus expectations (47.1%). This quarter, the gross margin of the software services business continued to rise to 75.7%.

2. iPhone: Average Selling Price Declined, Shipments Increased. This quarter, Apple's iPhone business generated revenue of $46.8 billion, up 1.9% year-on-year, better than market consensus expectations ($45.4 billion). The growth in the mobile phone business was mainly driven by the launch of iPhone 16e and early purchases by some consumers in response to tariffs. For this quarter, Dolphin estimates that overall iPhone shipments increased by 10.1% year-on-year, while the average selling price declined by 7.4% year-on-year.

3. Other Hardware Besides iPhone: Wearables and Other Businesses Will Continue to Face Pressure. Driven by new products and replacement demand, Apple's Mac and iPad businesses continued to grow this quarter. As for other hardware businesses such as wearables, although benefiting from China's subsidy policy, revenue still declined this quarter, indicating that overall demand remains quite weak.

4. Software Services: Reached a New High. This quarter, software services revenue was $26.6 billion, slightly lower than market consensus expectations ($26.7 billion). The revenue of the software business reached a new high this quarter, and the gross margin continued to rise to 75.7%. With a high gross margin, the company's software business, with nearly 28% of revenue, generated 45% of the company's gross profit.

Dolphin's Overall View: Although this quarter was decent, risks lurk beneath the "low growth".

The company's financial report data for this quarter was overall good, with steady growth in both revenue and profit. The growth in revenue was mainly driven by the growth of iPhone, Mac, iPad, and software services; the increase in the gross margin of software services structurally promoted the rise of the overall gross margin.

However, despite appearing "steady," this financial report hides some risks: 1) Even with the support of iPhone 16e this quarter, iPhone business growth was only slight; 2) Demand for wearable and other hardware products remained weak, with revenue still declining; 3) Although software services revenue continued to grow, the growth rate showed a declining trend; 4) Wearable and other hardware products will still be affected by tariffs, thereby increasing the company's related costs.

Regarding the impact of tariffs, which the market is concerned about, the company's management expects the impact on costs in the next quarter to be around $900 million. Dolphin believes that this mainly comes from products such as Airpods and Apple Watch, while core products (iPhone, Mac, and iPad) have been exempted. Therefore, compared to the company's nearly $40 billion in hardware costs per quarter, the impact of $900 million is relatively small but will still erode gross margins.

From a short-term perspective, the company expects revenue growth in the next quarter to be in the range of 0-5%. Although iPhone 16e was launched this quarter, the company's growth in the next quarter will still be weak. Under the influence of tariff policies, wearable and other hardware businesses will continue to face pressure, which will also erode the company's overall gross margin in the next quarter.

Combining the company's current market value of $3.2 trillion, it corresponds to a PE ratio of nearly 29 times for fiscal year 2025 (assuming a revenue growth rate of +4% and a profit growth rate of +7% after excluding the impact of last year's EU tax reimbursement). Although the company values shareholder interests (this quarter, it distributed $3.8 billion in dividends and repurchased $25 billion in shares, and will additionally approve $100 billion for share repurchases), multiple risks in operations will still put pressure on the company's valuation.

From a medium to long-term perspective, although the company has shifted some production capacity to Vietnam and India, as long as it is not manufactured locally in the US, there will be tariff risks in the future. In addition, the company will increase the proportion of chip procurement in the US in the future, which may also increase the company's future hardware costs. If Apple fails to launch AI functions or new hit hardware products that exceed expectations, the company's operations will still face growth pressure, making it difficult to boost market confidence.

Below is a detailed analysis

I. Overall Performance: Revenue & Profit, Steady Growth

1.1 Revenue: In the second quarter of fiscal year 2025 (i.e., 1Q25), Apple achieved revenue of $95.4 billion, up 5.1% year-on-year, slightly better than market consensus expectations ($94.2 billion). The increase in revenue this quarter was mainly driven by growth in iPhone, Mac, iPad, and software services, while only wearable and other hardware businesses continued to decline year-on-year. In this quarter, only revenue in Greater China declined, while revenue in other regions increased to varying degrees.

From the perspective of hardware and software:

① Apple's hardware business grew by 2.7% this quarter. Although the wearable and other businesses were still declining, the company's core hardware products (iPhone, iPad, and Mac) all increased by varying degrees, driving positive growth in the hardware segment.

② Apple's software business grew by 11.6% this quarter, maintaining double-digit growth. The software business has a certain degree of risk resistance. Even during periods of relatively low hardware revenue, software services have maintained growth. However, it cannot be ignored that the current growth rate of the company's software business is showing a declining trend.

From a regional perspective: This quarter, Apple's revenue only declined in Greater China, while it increased to varying degrees in other regions. The company's weak performance in Greater China was mainly affected by intense market competition. Although China has introduced subsidies for electronic products such as mobile phones, they are actually more beneficial to domestic Android brands, and Apple's market share in China has been eroded.

The Americas, Europe, and Greater China are the company's three main sources of revenue. Specifically, the Americas accounted for 42.3% of revenue, with an increase of 8.2% this quarter; Europe increased slightly by 1.3% this quarter; while revenue in Greater China declined by 2.3% year-on-year.

1.2 Gross Margin: In the second quarter of fiscal year 2025 (i.e., 1Q25), Apple's gross margin was 47.1%, up 0.5 percentage points year-on-year, in line with market consensus expectations (47.1%). The increase in the company's gross margin was mainly driven by the growth in the gross margin of the software business.

Dolphin breaks down the gross margins of hardware and software:

This quarter, Apple's software gross margin continued to rise to a record high of 75.7%, which was the main source of the company's gross margin increase this quarter. The gross margin of the hardware segment fell to 35.9%, down 0.7 percentage points year-on-year, mainly affected by factors such as product mix, foreign exchange, and seasonality. Among them, the relatively low-priced iPhone 16e launched by the company this quarter had a corresponding impact on the average price and gross margin of the company's product mix.

1.3 Operating Profit: In the second quarter of fiscal year 2025 (i.e., 1Q25), Apple's operating profit was $29.6 billion, up 6.1% year-on-year. The increase in operating profit this quarter was driven by revenue and gross margin improvements.

This quarter, Apple's operating expense ratio was 16%, up 0.2 percentage points year-on-year. The company's sales and administrative expenses remained stable, but AI investment at Apple is mainly reflected in R&D expenditures, and the additional expenses this quarter were also mainly reflected in R&D expenditures.

It is reasonable to infer that regardless of Apple's revenue in the future, R&D will rigidly increase. If AI-driven phone replacements cannot be delivered as scheduled, the company may rely on faster growth in software revenue to continuously improve its gross margin structure, but the release of operating leverage on the expenditure side is likely to be compressed.

II. iPhone: Average Selling Price Declined, Shipments Increased

In the second quarter of fiscal year 2025 (i.e., 1Q25), iPhone business revenue was $46.8 billion, up 1.9% year-on-year, better than market consensus expectations ($45.4 billion). The growth in Apple's iPhone business this quarter was mainly due to an increase in shipments. The decline in the average selling price of iPhones was mainly due to the low-priced version of iPhone 16e launched this quarter.

Dolphin specifically looks at the relationship between volume and price to see the main sources of iPhone business growth this quarter:

1) iPhone Shipments: According to IDC data, the global smartphone market increased by 1.5% year-on-year in the first quarter of 2025. Apple's global shipments increased by around 10% year-on-year this quarter, outperforming the overall market. Dolphin believes this is mainly due to two reasons: 1) The company launched iPhone 16e, and the introduction of new products drove an increase in demand; 2) Uncertainty in US tariff policies led to expectations of price increases, prompting some consumers to make early purchases.

2) iPhone Average Selling Price: Combining iPhone business revenue and shipment calculations, the average selling price of iPhones this quarter was around $809, down 7.4% year-on-year. This was mainly due to the low-priced version of iPhone 16e launched by the company this quarter, which structurally lowered the average product price of the company's iPhone mix.

III. Other Hardware Besides iPhone: Wearables and Other Businesses Will Continue to Face Pressure

3.1 Mac Business

In the second quarter of fiscal year 2025 (i.e., 1Q25), Mac business revenue was $7.9 billion, up 6.7% year-on-year, basically in line with market expectations ($7.8 billion).

According to IDC's report, global PC market shipments increased by 5% year-on-year this quarter, while Apple's PC shipments increased by 14.6% year-on-year. The company's performance was significantly better than the overall market, mainly driven by the latest MacBook Air, MacBook Pro, and Mac mini models.

Combining company and industry data, Dolphin estimates that the average selling price of the company's Macs this quarter was $1,445, down 6.9% year-on-year. The growth in the company's Mac business this quarter was mainly driven by an increase in shipments.

3.2 iPad Business

The iPad business generated revenue of $6.4 billion in the second quarter of fiscal year 2025 (1Q25), representing a year-on-year increase of 15.2% and outperforming market consensus expectations ($6.2 billion). This growth was primarily driven by the new iPad Air equipped with the M3 chip.

From an industry perspective, the tablet market has shown signs of recovery, with year-on-year growth achieved in the past three quarters. Since the public health event, there has been a replacement demand in the tablet market. Additionally, due to China's subsidy policies, some iPad products fall within the relatively favorable subsidy range, which is also expected to contribute to an increase in sales.

3.3 Wearables and Other Hardware

Revenue from wearables and other hardware was $7.5 billion in the second quarter of fiscal year 2025 (1Q25), down 4.9% year-on-year and below market consensus expectations ($8.1 billion). Wearables and other hardware businesses have seen declines for seven consecutive quarters, indicating that downstream demand remains sluggish.

With the implementation of subsidies in China, wearable products such as watches will benefit from policy support. However, it cannot be ignored that the US tariff policy currently exempts iPhone, Mac, and iPad but not products like AirPods and Apple Watch, which will put pressure on the wearables and other hardware business.

IV. Software Services: Reaching New Heights

Software services revenue was $26.6 billion in the second quarter of fiscal year 2025 (1Q25), up 11.6% year-on-year but slightly below market consensus expectations ($26.7 billion). Although the business still maintained double-digit growth, the growth rate showed a downward trend. The growth in software services was mainly driven by user retention and an increase in revenue per user.

According to Sensor Tower data, Apple's App Store revenue for this quarter increased by 13% year-on-year, with downloads up 3.8% year-on-year.

Among software services, the gross margin level is of particular concern. In this quarter, the gross margin of software services continued to rise to 75.7%, standing firm above 74% for five consecutive quarters and reaching a new high. With its high gross margin, the company's software business generated 45% of the company's gross profit with nearly 28% of revenue in this quarter.

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