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Home / Mac / Apple Inc. (AAPL) Q3 2019 Revenue Call Transcript – The Motley Fool

Apple Inc. (AAPL) Q3 2019 Revenue Call Transcript – The Motley Fool

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Apple Inc. (NASDAQ: AAPL)
Q3 2019 Earnings Call
30. Christmas. 2019 5:00 p.m. ET


  • Prepared Notes
  • Questions and Answers
  • Call Participants

Prepared Notes:


Good day and welcome to Apple Incorporated Third Quarter Fiscal Year 2019 Revenue Conference Call. [Operator Instructions]. At this time of opening remarks and introductions, I will transfer the conversation to Nancy Paxton, Senior Director of Investor Relations. Please move on.

Nancy Paxton ̵

1; Senior Director of Investor Relations

Thank you. Good afternoon and thanks to everyone who joined us today. First, Apple's CEO, Tim Cook, speaks and is followed by CFO Luca Maestri. And after that, we open the call to analyst questions. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including, without limitation, information on income, gross margin, operating expenses, other income and expenses, taxes, capital allocation and future business prospects. Actual results or trends may differ materially from our forecast.

For more information, please refer to the risk factors discussed in Apple's last filed periodic reports on Form 10-K and Form 10-Q, and Form 8-K filed with the SEC today, along with the related press release. Apple assumes no obligation to update any forward-looking statements or information that speak from their respective dates.

I will now transfer the call to Tim for introductory comments.

Tim Cook Cheif Executive Officer

Thank you, Nancy. Good afternoon, and thank you to all of you who joined us today. We are pleased to report growth and a new sales record of $ 53.8 billion in the June quarter. We saw significant year-over-year improvement in iPhone performance compared to the previous quarter, very strong performance for both Mac and iPad, and absolutely blew the quarter for wearable clothing where we had accelerated growth of well over 50% and a new high watermark for services where we have an all-time revenue record of $ 11.5 billion. Going back and considering wearables and services together, two areas where we have strategically invested in recent years, they are now approaching the size of a Fortune 50 company.

Geographically, we are pleased with our performance across the board, including, a return to growth in China. We achieved these results despite strong headwinds from foreign currencies, which affected our top line growth by 300 basis points compared to a year ago. This is equivalent to about $ 1.5 billion in sales.

It is important that revenue grew in constant currency across all five of our geographical segments. For the iPhone, we generated $ 26 billion in revenue. Although this is down 12% from last year's June quarter, it is a significant improvement to the 17% year-over-year decline in Q2. We are encouraged by the results we see from the initiatives we talked about in January, including strong customer response to our in-store exchange and financing programs. In fact, iPhone returned in stores and online stores for growth on a yearly basis in June. Our active, installed base of iPhone reached a new high all the time and was up year over year in each of our top 20 markets, underscoring the quality of our products and the satisfaction and loyalty of iPhone customers around the world. [19659015] Revenues excluding the iPhone increased by 17% from last year with growth in all categories. Starting with services, we generated record revenue of $ 11.5 billion at all times, up 13% year-on-year, and if we exclude the favorable one-off $ 236 million from June quarter last year, services growth was 15%, or 18 % in constant currency, which is in line with our second quarter.

Our strong service was broad-based. We set new record opportunities for AppleCare, Music, cloud services and the App Store search advertising business, and we set a new third-quarter revenue record for the App Store. In addition, we saw double-digit sales growth of services in all five of our geographical segments. We surpassed 420 million paid subscriptions to services across our platform, and we're on track to double fiscal year 16 Service Revenue in 2020.

In May, we launched our brand new Apple TV app in over 100 countries, bringing together all the ways to watch TV in a single app across iPhone, iPad, Apple TV and choose smart TVs. Monthly viewers in the Apple TV app in the US are up over 40% year-over-year. We have seen our success be driven here by several factors. First, the fact that we've been able to integrate content from over 150 leading content providers all in one place. Secondly, the same ease of use and the unmatched user interface that sets Apple apart from other categories also differentiate us in TV. And third, we benefit from a broader, secular move to top services.

We work on the third trend in five ways. Our Apple TV hardware, Apple TV channels where customers can only choose to pay for the channels they want, our huge library of over 100,000 iTunes movies and TV shows, the App Store where users can find their favorite streaming services and later this year , our original programming service, Apple TV Plus. Apple Pay now completes nearly 1 billion transactions per month, more than double the previous year. Apple Pay launched in 17 countries in the June quarter, completing coverage in the EU and bringing us to a total of 47 markets currently. Based on performance in June, Apple Pay is now adding more new users than PayPal, and its monthly transaction volume is growing four times as fast. In the United States, in addition to a successful integration into Portland's transportation system in May, we will begin rolling out New York City Transit and launch in Chicago later this year.

In China, Apple Pay launched the debit card for DiDi, the world's largest tour provider. As I have said before, transit integration is an important driver for a wider digital wallet adoption, and we will continue this pressure to help users leave the wallet at home in more and more cases. On a related note, thousands of Apple employees use Apple Card every day in our beta test, and we plan to start rolling out Apple Card in August.

As I mentioned initially, it was a new notable quarter for portable, with growth accelerating to well over 50%. We had good results for Apple Watch, which set a new revenue record in the June quarter and reaches millions of new users. Over 75% of customers who bought Apple Watch in June quarter bought their first Apple Watch. We continue to see phenomenal demand for AirPods, and as you summarize the past four quarters, the Wearables business is now larger than 60% of Fortune 500 companies.

We had good iPad performance with over $ 5 billion in revenue and growth driven by the iPad Pro, and strong customer response to the new iPad mini and iPad Air. This was our third consecutive quarter of growth, and with sales up 15% so far today, we feel good when we're on the road with the iPad. With our current line of iPad, iPad Mini, iPad Air and iPad Pro, we have the perfect device for everyone from young students to professionals.

We were also very pleased with the double digit revenue growth from Mac, driven by a strong performance of MacBook Air and MacBook Pro. Looking ahead, there's a lot to be excited about for Mac. At the height of the Mac Mini and iMac updates earlier in the fiscal year, we brought significant updates to the bulk of our laptop series over the past few months. We now have a $ 999 MacBook Air which is the killer for students, and for our professional users pushing the limits of what a Mac can do, we were thrilled to be unveiled by the most powerful Mac ever, the new Mac Pro and the all new Pro show XDR , which will be available this fall. Designed for maximum performance, expansion and configurability, and at breakthrough prices, they are the most powerful tools Apple has ever put in the hands of Pro customers. In addition, the Mac ecosystem as a whole is about to get a big boost. At our recent Worldwide Developer Conference, we announced a game-changing tool that helps developers easily customize their iOS and iPad iOS apps for Mac. I want a little more to say about that in a moment.

I want to give some color to our performance in Greater China, where we saw significant improvement over the first half of fiscal year 2019 and return to constant currency growth. We experienced noticeably better year-over-year comparisons for our iPhone business there than we saw in the past two quarters, and we had improved performance across all categories in order. The combined effects of state stimulus, consumer response to trade-in programs, financing offers and other sales initiatives, and increasing engagement with the broader Apple ecosystem, had a positive effect. We were particularly pleased with a two-digit increase in services driven by strong growth from the App Store in China.

When it comes to the future. Last week, we announced an agreement with Intel to acquire most of the smartphone modem business. This is our second largest acquisition of dollars, and our largest ever in terms of employees. We look forward to welcoming them all to Apple. We see this as a great opportunity to partner with some of the leading talent in this field, to expand our portfolio of wireless technology patents to over 7,000, to accelerate the development of our future products and to continue our long-term strategy to own and control the primary technologies behind the products we make.

We also had our best WWDC ever last month, packed with announcements of great new features coming this fall across our four software platforms, making them more powerful, more personal and more private. For iPhone users, iOS 13 will get a dramatically new look in dark mode, while delivering important updates to the apps you use every day, including photos, camera and maps. iOS 13 offers great new ways to help you manage your privacy and security, including signing in with Apple, which uses Face ID or Touch ID to quickly log in to apps and websites without sharing your personal information. And improvements throughout the system will make the iPhone even faster and more comfortable to use than ever before.

For the first time, iPad gets its own version of iOS called iPadOS, a strategic step forward that takes the iPad experience to a whole new level. The redesigned home screen, powerful new multi-tasking tools, and deeper integration with Apple Pencil continue to drive productivity and creativity, including the use of the iPad as an extended and interactive secondary display for the Mac. For Apple TV, TvOS 13 will make the big screen experience even more personal. With a redesigned home screen and multi-user support, everyone in the family can have a more engaging and tailored experience with their favorite TV shows, movies, sports and news, along with Apple music images and videos in iCloud, and an App Store with thousands of great games and apps.

WatchOS 6 is an important step forward to help Apple Watch users stay healthy, active and connected. Apple Watch now has a dedicated App Store that users can access directly from the device, and new watches, Siri enhancements, and music and audio features make Apple Watch more useful than ever. And of course, we continue to innovate in Apple Watch's promise to be an intelligent guardian of your health. WatchOS 6 includes powerful new features such as alerts that warn of high decibel noise to protect your hearing, and cycle tracking to help make decisions about women's health care.

In the June quarter, we expanded the availability of the ECG app and announced irregular rhythm to five more European countries, and just released Canada and Singapore last week, making them available in 31 countries and regions around the world with more to come later this year. We are very proud of the muscle we have built to bring regulated products like these to market. This is an important competence that creates exciting opportunities for us in the future.

As I mentioned before, we believe Mac OS Catalina will be a breakthrough in the Mac ecosystem. A new tool included in Mac OS Catalina called Mac Catalyst gives developers a big head start on bringing their iOS apps to the Mac. Thousands of developers are already using it to bring their apps to the Mac ecosystem, and we expect to see a surge of popular apps coming to Mac this fall.

Again when we take a step back and digest the bigger picture here, these updates of the latest steps in a broader strategic effort to make the user experience across iOS, Mac OS, iPad OS, Watch OS and TvOS more effortless and more intuitive. Apple is alone in offering this type of value and ecosystem to its customers, and their devices and platforms are unmatched in their ease of use, their seamlessness and their privacy and security. And while delivering these things, we've created a dynamic environment where a developer benefits from creating and distributing on these platforms. And of course, our customers benefit greatly from access to all this creativity and innovation.

We also unveiled other exciting technologies to make it easier and faster for developers to create powerful new apps. SwiftUI provides an intuitive new framework for building sophisticated user interfaces across software platforms using simple, easy-to-use code. Core ML3 supports acceleration of several types of advanced real-time machine learning models and Create ML allows developers to build machine learning models without writing code.

We have the world's largest augmented reality activation platform, and thousands of AR Kit enabled applications in the App Store. Based on this strategy and our momentum in this area, we introduced three new AR-based technologies. ARKit 3 uses real-time machine learning to recognize the human form and seamlessly integrate humans into AR experiences. The Reality Kit is a new developer framework built from the ground up to provide all the tools and technologies required to bring AR objects closer to life. And Reality Composer brings AR content creation to tens of millions of developers who had no 3D experience. Our developers are already running these new technologies, and we think our customers will love some of the apps these creators have in store for months to come.

On so many fronts, there is a huge amount to look forward to in the coming months, including the launch of new services, such as Apple Arcade, Apple TV Plus and Apple Card. And without giving too much away, we have several new products that we can't wait to share with you. Until then, thank you for joining us today and for more information on the results in the June quarter, I will transfer the call to Luca.

Luca Maestri CFO

Thank you, Tim. Good afternoon everyone. We are pleased to report sales of $ 53.8 billion in June, up 1% year-on-year. We returned to growth despite a difficult currency environment around the world, which affected growth during the year by 300 basis points. We set revenue records for June in America, Japan and the rest of the Asia-Pacific. And as Tim mentioned earlier, all of our geographic segments grew in constant currency.

Total product revenue was $ 42.4 billion, down 2% from a year earlier, which is significantly better than the 8% decline in product revenue that we experienced in the first half of the fiscal year. Product categories outside the iPhone grew by 20%, with strong results in laptops, Macs and iPad. Service revenues grew by 13% to a new record of $ 11.5 billion. Excluding the one-off item we highlighted a year ago in connection with the final resolution of various lawsuits, the revenue growth of services was 16% and 18% in constant currency terms.

Geographically, we saw a marked improvement in year-on-year comparisons of emerging markets compared to the first half of this fiscal year, especially in BRIC countries where earnings for the year went from a 25% decline in revenue in the first half to 3% growth in June quarter. We set revenue records for June in several major developed markets, including the United States, Canada, Germany, France, Japan, Australia and Korea. In emerging markets, we returned to growth in China, grew strong double digits in India and Brazil, and set new Q3 records in Thailand, Vietnam and the Philippines.

The gross margin of the company was 37.6%, flat in a row, and in line with our guidance. Product gross margin was 30.4%, down approximately 80 basis points sequentially due to seasonal loss of leverage and product mix, partially offset by favorable costs. The service's gross margin was 64.1%, up 30 basis points sequentially, mainly due to a favorable mix. Net income was $ 10 billion diluted earnings per share was $ 2.18, and cash flow from operations was $ 11.6 billion.

Let me get closer to each of our revenue categories. iPhone revenue was $ 26 billion, down 12% from a year ago. This was a significantly better year-over-year result than in the previous quarter, down 17% with a sequential year-over-year improvement in 15 of our top 20 markets.

Our active installed base of iPhone continued to grow to a new all-time high in each of our geographic segments, and in the United States, the latest survey of consumers from 451 Research indicates customer satisfaction on iPhone at 99% for iPhone XR, iPhone XS and XS Max combined. Among business buyers planning to buy smartphones in the September quarter, 83% plan to buy iPhones.

In terms of services, we reached an all-time revenue record despite headwinds in foreign currency with double-digit growth from the App Store, Apple Music, cloud services and AppleCare, and three-digit growth from Apple Pay and our App Store search advertising business. All geographical segments saw double-digit growth in service revenue and set new records for the June quarter, with records at all times in the Americas and the rest of the Asia-Pacific. In total, services accounted for 21% of revenue upwards and 36% of gross margin dollars.

Customer involvement in our ecosystem continues to grow. The number of transaction accounts in our digital content stores reached a new high all the time in the June quarter, and the number of paid accounts grew by strong double digits compared to last year. We now have over 420 million paid subscriptions across the services on our platforms, and we are well on our way to our goal of surpassing the $ 500 million mark by 2020. In the App Store, our growth accelerated in order. Our subscription business continues to grow strongly and is extremely diversified into many categories such as entertainment, lifestyle, photography and video and music. Third-party subscription revenue increased by over 40%, and across all third-party subscription apps, the largest accounted for only 0.25% of total service revenue.

Among our many service registrations, it was our best quarter ever for AppleCare. We are seeing an increase in service contract attachment prices, and are expanding AppleCare distribution through our partners. We recently expanded our authorized service provider network, and nearly 1,000 Best Buy stores across the United States now offer expert service and repair for Apple products. This extension gives customers an even easier access to repairs by using parts that are certified for safety, quality and reliability. In addition to our stores, there are over 1,800 third-party Apple Authorized Service Providers in the United States, which are three times as many locations as they were three years ago.

Next I want to talk about the Mac. Revenues were $ 5.8 billion, up 11% on last year. Mac revenue grew in four of our five geographic segments, setting a record for the June quarter in the United States, Europe and Japan, as our overall market performance significantly outperforms the global PC industry. Nearly half of the customers who purchased Macs during the quarter were new to Macs, with revenue growth in both developed and emerging markets, and the active installed base of Macs reached a new high again.

We also had good results for iPad with $ 5 billion in sales, up 8%. iPad sales grew in all five of our geographical segments, with a third-quarter revenue record in China and double-digit growth in emerging markets. In total, more than half of the customers who purchased iPads during the June quarter were new to iPad, and the iPad-active installed base also reached a new high.

Recent surveys from 451 Research measured 94% customer satisfaction rating for iPad from consumers and among business customers who plan to buy tablets in the September quarter, 75% plan to buy iPads. Portable revenue, home and accessories accelerated across all of our geographical segments, grew 48% to over $ 5.5 billion and set a record for June. This growth was primarily driven by the strong performance of our Wearables business, which was up over 50% and has become the size of a Fortune 200 company over the past 12 months. In addition, we generated double-digit revenue growth from Apple TV and accessories during the quarter.

Our retail and online stores produced the best revenue in the June quarter ever with double-digit revenue growth across Apple Watch, iPad, Mac and accessories. The provider program shows great momentum with more than five times the number of iPhones traded in compared to a year ago. We opened fantastic new stores in the Carnegie Library in Washington DC and the Shinji District business district of Taipei, as well as a beautiful new location in the Dallas Galleria.

We ended the quarter with 506 physical stores in 22 countries, along with our online store presence in 35 countries. In the corporate market, we gain traction in our strategy to transform major industries by expanding our leading positions in key functional areas to expand the reach and modernize customer and employee experiences. In the financial industry, 90 of the largest 100 asset-based banks distribute Apple products to improve efficiency and effectiveness across their organizations.

iPhone and iPad are overwhelmingly the preferred mobile devices for bankers on the go. For example, 60% of major banks support iPads for asset managers. In retail banks, two-thirds of the top banks are distributing iPad for branch transformation and modernizing legacy interfaces with a unified iPad experience. One of the world's largest banks created an iPad package that reduced customer on-board time from more than an hour to just 12 minutes. Bank branch employees also use Apple Watch for communications and notifications, and Apple TV for customer presentations from iPads using AirPlay. Financial institutions also tell us that they receive positive feedback from leveraging Apple solutions for direct customer engagement. American Express, Credit Suisse, Discover and TD Ameritrade have launched Apple Business Chat as a dynamic way to support and interact with customers. The intuitive messaging interface on iOS enables rich communication between customers and contact center staff. TD Ameritrade also became the first broker in the world to enable instant payment of accounts using Apple Pay, eliminating the two to three business days it used to take to fund accounts by bank transfer.

Let me now turn to our cash position. We ended the quarter with almost $ 211 billion in cash plus transferable securities. We withdrew $ 3 billion in short-term debt and reduced commercial paper by $ 2 billion during the quarter, leaving us with a total debt of $ 108 billion. As a result, net cash was $ 102 billion at the end of the quarter, and we continue to reach a net cash neutral position over time.

We returned over $ 21 billion to shareholders during the quarter, including $ 17 billion through open market repurchases of nearly $ 88 million in Apple shares and $ 3.6 billion in dividends and equivalents. As we move into the September quarter, I will review our outlook, which includes the types of forward-looking information that Nancy referred to, at the beginning of the conversation.

We expect revenues to be between $ 61 billion. and $ 64 billion. This guide includes nearly $ 1 billion of the year-on-year negative impact of currency. We expect the gross margin to be between 37.5% and 38.5%. We expect OpEx to be between $ 8.7 billion and $ 8.8 billion. We expect Y&E to be around $ 200 million and we expect our tax rate to be around 16.5%. Even today, our Board of Directors has declared a cash dividend of $ 0.77 per share of common stock, payable on August 15, 2019, to shareholders from August 12, 2019. With that, I would like to open the conversation to questions.

Questions and Answers:

Nancy Paxton Senior Director of Investor Relations

Thank you, Luca. And we ask you to limit yourself to two questions. Operator, we may have the first question.


The first question comes from Amit Daryanani of Evercore.

Amit Daryanani Evercore – Analyst

Thanks a lot – thank you for taking my question, folks. I guess two from me. First, you can only talk about it, when I think of the September quarter guide it hints, I think of 16% or so continuously. Historically, the guidance has been at least in the 10% or low two-digit range. Can you help us understand what gives you confidence for a better season guide September. Is it from a geo-product base? Would be helpful.

Luca Maestri CFO

I mean to say – it's Luca. Of course, this is our best estimate of where we think we will land. Obviously, we expect continued strong growth from the non-iPhone categories. We have a lot of momentum on wearables. We mentioned that we were up almost 50% in the June quarter, or actually over 50% in the June quarter. We set a record of our service business all the time in June, which is why these two categories have become very important and really big for us. And then as we continue to grow fast, it will help us as we go through the year. Keep in mind that the guidance includes an estimated $ 1 billion downwind for the quarter.

Amit Daryanani Evercore – Analyst

Fair enough, it's really useful. And I guess if I just follow up with China, I'm impressed to see the continued recovery you see there, despite all the headlines out there. Just curious, what are the few things driving success in China, and how sustainable do you think this will change for Apple as you move forward?

Tim Cook Cheif Executive Officer [19659014] Yes, Amit. Hi, it's Tim. And I'm sorry about my voice, I'm suffering from an allergy. But what happened last quarter in China was – it's a coincidence of things. The government is stimulating this when it comes to VAT reduction, very bold. We took some price action, launched our exchange and financing programs in our stores and worked with certain channel partners as well, and we see a growing engagement with the broader Apple ecosystem during the quarter.

So when you look at it, each of our categories improved – iPhone, iPad, Mac, wearables, services – gradually. So we couldn't be happier with the results or progress, I should say. I would like to point out that I think I mentioned in my comments, that we actually grew in constant currency for Greater China and that we grew in China on a reported basis. So there are several things that happen there that are quite positive.

Nancy Paxton Senior Director of Investor Relations

Thank you, Amit. Can we have the next question?


And that question comes from Shannon Cross with Cross Research.

Shannon Cross Cross Research – Analyst

Thank you very much. Can you talk a little bit about what is going on in services, some of the set and take? I know, Luca, you gave us some color in terms of growth and that, but I'm just curious – and I know you don't want to talk about future products. But when you think about the opportunity, do you think about what you have got now and in the future, and then some of what has happened to China, and that, is this something that can increase again? Or again, the 18% on an exchange rate – constant currency basis is obviously pretty strong, but how do you think about that?

Luca Maestri Chief Financial Officer

Yes, I think it's important to start with the 18% in constant currencies, Shannon. Our reported results have been normalized, removing the one-off item from 15% last year. Det er klart FX spiller en rolle rundt hele verden på 300 basispunkter for FX-påvirkning i løpet av juni kvartal. Til tross for det var det en rekordinntekt til alle tider. Den installerte basen vår fortsetter å vokse. Den vokser i hver geografi, og den vokser i alle de viktigste produktkategoriene våre, og det er veldig, veldig viktig for tjenestene – for tjenestevirksomheten.

Jeg vil si, jeg vil gi deg litt mer farge rundt to motregningsfaktorer rundt denne utviklingen i løpet av juni kvartal. På den ene siden, App Store, nevnte jeg i mine forberedte kommentarer at veksten akselererte sekvensielt. Vi hadde tosifret vekst på App Store i hver geografi. I Kina så vi betydelig akselerasjon. Som du vet, har vi en tendens til å tjene penger i Kina på App Store gjennom spilltitler, og regjeringen har godkjent noen få viktige spilltitler i løpet av kvartalet. That has helped our performance there.

On the other side, AppleCare — I mentioned AppleCare was an all-time record in June. So really strong performance, but our growth has decelerated in AppleCare due to factors that we fully expected because we are counting this expansion of our coverage for AppleCare that we've had. We've had significant success during the last 18 to 24 months in really broadening our coverage of AppleCare around the world with some key partners, carriers, and resellers, and obviously as we go through the year those counts become a bit more difficult. We don't — having said all that, we've given ourselves a couple of targets and we feel very confident about reaching those targets. The first one is that we wanted to double the size of the services business from our fiscal '16 to 2020. We are on our way there. Paid subscriptions is another target that is important to us. It's an important way for us to monetize our ecosystem.

We set a target of surpassing 0.5 billion paid subscriptions on the ecosystem during 2020. We are already at 420 million now, so we feel confident there. And of course, as you mentioned, we're very excited about the fact that we're going to be launching new services soon. As Tim said, we are starting the rollout of Apple Card in August, and there's two more very important services that we're going to be adding to our portfolio during the fall. One is Apple Arcade, which is our gaming subscription service and of course, Apple TV Plus, which is our video streaming service. So obviously these services will help us carry on with the momentum that we have in services.

Shannon CrossCross Research — Analyst

Great, thank you. And then this is probably for you too as well, Luca. Can you talk about gross margin? The guidance was pretty solid. Obviously there are various things that are at play here. I know you mentioned $1 billion worth of top line impact I think from currency next quarter, but maybe if you can kind of talk about what went into your gross margin guidance? Thanks.

Luca MaestriChief Financial Officer

Yeah. So, of course, Shannon, as you've seen, our guidance for margin is 50 basis points higher than the guidance that we had given for June. I would say on the positive, we expect to benefit from leverage, as you've seen from our revenue guidance, and from cost savings because as you know, the commodity environment is fairly favorable right now. On the negative side, the headwind on gross margins on a year-over-year basis from foreign exchange is about 100 basis points. And so we need to keep that in mind, but we feel pretty good about the guidance we provided.

Nancy PaxtonSenior Director of Investor Relations

Thanks, Shannon. Could we have the next question please?


Our next question will come from Katy Huberty with Morgan Stanley.

Katy HubertyMorgan Stanley — Analyst

Yes, thank you. I'd like to go back to the discussion around strength in China in the quarter, and understand what linearity looked like. I ask because there was some industry data around the smartphone market in China that seem to deteriorate in the month of June. The App Store data deteriorated a little bit in June, and just curious if that's something you saw on the business, and if it at all informs your outlook around the pace of the China business as you go into September?

Tim CookCheif Executive Officer

Katy it's Tim. We obviously took into account all of the information that we had in coming up with the guidance, including the linearity across last quarter and how this quarter has started. And so, we obviously look at that in quite much detail.

Katy HubertyMorgan Stanley — Analyst

And then just on the App Store, I appreciate there's not a lot of detail out around exact timing and even some pricing of the new services, but how should we think about the new services that launched in March impacting the overall services growth? Does that start to benefit the model in the back half of this calendar year? Or will the impact to be more longer-term in nature and really show up in 2020?

Luca MaestriChief Financial Officer

Katy, let me just talk about the new services that we've announced in March, and then also about the timing, how we get to revenue, right. We've announced Apple News Plus, and this is the service that is available for consumers right now. We've announced our channel service, which has also become available a few weeks ago. The other three services — the card is launching in August, the gaming service and the video service are starting in the fall. Keep in mind for all these services there is a trial period upfront. It is going to be different trial periods. We'll see what they look like. So the road to monetization takes some time. Obviously all of them will add to our base and will help us with growth rates as we get into next year.

Nancy PaxtonSenior Director of Investor Relations

Thank you, Katie. Could we have the next question please?


That question will come from Krish Sankar with Cowen & Company.

Krish SankarCowen and Company — Analyst

Yeah, hi, thanks for taking my question, I have two of them. First one, on the iPhone trade-in program, how effective was it and what percentage of the iPhone sales came from the trade-ins? And are there any other geographies where you left to roll it out? And then I had a follow-up.

Tim CookCheif Executive Officer

Hi, it's Tim. In retail, it was quite successful. We got going in a larger way during that quarter. We were pretty much just ramping in the previous quarter. And trade-in as a percentage of their total sales is significant, and financing is a key element of it. Those two things in the aggregate led retail, the combination retail and online. We just short-formed that as retail. Apple Store led to growth in June and so we feel very, very good about the trajectory. We are obviously taking those programs and advocating those more widely, and that is that different levels of implementation throughout different geographies. We're working with our carrier partners on those, and retail partners.

Krish SankarCowen and Company — Analyst

Got it. That's very helpful. Tim. And then a follow-up for you — a much longer-term question. I understand. We are in the very early innings of the services growth story. Is there a way to think about it down the road that three or five years down the road, will the services growth be focused or would it still be tethered to the hardware of the iPhone? Or do you think at some point down the road, those services will be independent by itself not really tied to your hardware installed base?

Tim CookCheif Executive Officer

Well, there are elements today that are not necessarily tethered to iPhone, right? We have other products, where people are purchasing things, they're watching Apple TV, we offer Apple Music on Android. And so there is a series of things that are outside of that, and so we'll see what we do in the future. I don't want to really get in, get into that. But more broadly, to answer your question about growth as we go forward, the way I see it as we had the strongest hardware portfolio ever. We've got new products on the way. The pipeline is full of great new stuff both on the product and the services side. We're very fortunate and have worked very hard to have loyal customers, and to continue tracking an impressive number of switchers.

The installed base is growing — hit a new record. That's obviously good and it hit of new record across all geographies and across all categories. And so this is a really good thing. And we've got the wearables area that is doing extremely well. We, stuck with that when others perhaps didn't and really put a lot of energy into this and a lot of R&D, and are in very good position today to keep playing out what's next there.

At the same time on the market side, we have emerging markets where we have low penetration and during the quarter tactically, emerging markets had a bit of a rebound. In fact on a constant currency basis, we actually grew slightly in emerging markets. We still declined on a reported basis. India bounced back during the quarter. We returned to growth there. We are very happy with that. We grew in Brazil as well. We are also continuing to focus on the enterprise market. Luca mentioned some of this in his comments, and we think that continues to be a big opportunity for us. And then we've got lots of what I would call core technology kinds of things like augmented reality, where we are placing big bets and I think we have a big future in addition to the health kinds of things that may fall out of the Watch.

And so hopefully that kind of gives you a view over the total. And so we're focusing on products and services, and there will be some services that aren't booked and some that — some that we are looking at are not on current period sales. Mostly, very much, services are rarely connected on that today, or at least not a high percentage by any means. They are more correlated to the installed base, the active installed base, and also the level of transacting customers that are there and the amount per customer, which relates also to the offering that we have.

Nancy PaxtonSenior Director of Investor Relations

Thank you, Chris. We have the next question please?


Next we'll go to Wamsi Mohan with Bank of America Merrill Lynch.

Wamsi MohanBank of America Merril Lynch — Analyst

Yes. Thank you, Tim. The China trade situation remains sort of fluid over here and recently, more recently, you asked for some tariff exceptions, were not granted those. How are you thinking about the longer-term footprint for manufacturing? And can you talk about any potential alternatives that you looked at and considered in moving parts of production potentially out of China? And I have a follow-up.

Tim CookCheif Executive Officer

Yeah, I know there's been a lot of speculation around the topic of different moves and so forth. I wouldn't put a lot of stock into those if I were you. The way that I view this is the vast majority of our products are kind of made everywhere. There is a significant level of content in the United States, and a lot from Japan to Korea to China, and the European Union also contributes a fair amount. And so that's the nature of a global supply chain. I think, largely I think that will carry the day in the future as well. In terms of the exclusions, we've been making the Mac Pro in the US, and we want to continue doing that. And so we are working and investing currently in capacity to do so, because we want to continue to be here. And so that's what's behind the exclusions. And so, we're explaining that and hope for a positive outcome.

Wamsi MohanBank of America Merril Lynch — Analyst

Okay. Thanks, Tim. And there is, Luca maybe for you. There has been some significant de-stocking of inventory in the first calendar half of this year and iPhone. Can you comment about the broader channel inventory levels, where you are in your typical ranges, especially given the comment around June iPhone sales being quite strong? And do you expect anything atypical in channel inventory dynamics in the September quarter? Thank you.

Luca MaestriChief Financial Officer

Yes Wamsi, as you know, we are not getting into this topic very much but I think I can give you some color here. You know that in general we decrease our inventory during the March quarter and the June quarter? That has been traditionally what we've done. This year, we reduced channel inventory for iPhone slightly more than last year and that is true in total, and it's true for Greater China as well. So we feel very good about our channel inventory ranges as we get into the September quarter. I hope that helps you with that.

Nancy PaxtonSenior Director of Investor Relations

Thank you, Wamsi, can we have the next question please?


Our next question comes from Jim Suva with Citigroup.

Jim SuvaCitigroup — Analyst

Thanks very much. The first question is probably for Tim, and the second one for Luca, and I will offer them at the same time. So you can pick and choose whichever one wants to answer first or second. So the first question Tim, regarding the installed base comment you made, which is quite encouraging, but yet when you look at the iPhone revenue year-over-year, over the past several quarters has been down. Can you help us bridge the gap of how is the installed base is growing? Is it mostly because like secondary users are the new ones coming into the system? Are people holding their phones longer? And what does that user typically bring in with them, or is something unique relative to what we historically know?

And then for Luca, you been investing a lot, a lot, lot, lot. And a lot of these services are now coming to pass, whether it be AppleCare, Apple Cloud, all these wearables, and soon Apple Pay and Arcade. Are we we at a point where now a lot of harvesting is going to happen? Or do you kind of continue this is relatively same investment that you've been doing for the future strategy? Thank you.

Tim CookCheif Executive Officer

Hey, Jim, it's Tim. I'll start with your installed base question. Installed base is a function of upgrades and the time between those. It's a function of the number of switchers coming into the iOS, Mac OS, and so forth tense. It's a function of the robustness of the secondary market, which we think overwhelmingly hits incremental customer and it's a function is still in the emerging markets, and somewhat developed markets to a lesser degree, of people new — they're buying their first smartphone. There are still quite a few people in the world in that category. And so, the reason that the installed base doesn't correlate to the 90-day clock, is that what's happening underneath the numbers is switchers are still a very key piece of what's going on. The secondary market is very key and we are doing programs, etc., to try to increased up because we think we wind up hitting a customer that we don't hit in another way. And the upgrades, where people are holding onto the device a bit longer than they were, they're staying in the ecosystem. And then you have the people in the new category as well, and so that's sort of the equation. I don't want to go into the specific numbers, but I think you can see readily mathematically how the installed base is growing in an environment where the iPhone revenue is declining within a 90-day kind of window.

Luca MaestriChief Financial Officer

And, Jim, on OpEx. Obviously it's very important for us to continue to invest in the business, particularly on the R&D side because we were always want to bring more innovation into the market. We want to improve the user experience and differentiate our products and services in the marketplace. So we will continue to do that. There are some type types of investments, of course, that are very strategic for us and they will have long-term implications. You've seen the announcement that we made around the Intel acquisition, very important strategically for us. It requires upfront investment, of course. As you've seen from this quarter and also from the past, we will continue to run our SG&A portion of OpEx tightly. We will of course, will continue to invest in marketing and advertising.

We talked about a lot of new services, that we are launching during the fall and Apple Card, that next month — obviously they will require the appropriate level of marketing and advertising as we launch into the general public. When you look in total at where we are in terms of our expense-to-revenue ratio for operating expenses, you know quite well that we are extremely competitive relative to other tech companies, so we want to continue to to be competitive and at the same time, we will not under invest in the business.

Nancy PaxtonSenior Director of Investor Relations

Thank you, Jim, could we have the next question please?


The next question will come from Samik Chatterjee with JP Morgan.

Samik ChatterjeeJP Morgan — Analyst

Hi, thanks for taking the question. I just wanted to start off with the announcement of the WWDC around the independent App Stores for the Watch and the iPads. What level of interest have you seen from developers and how are they thinking about the ability to monetize services independently on those App Stores? And how does it help you position Wearables more firmly into the health and fitness category?

Tim CookCheif Executive Officer

We're seeing good interest across virtually everything that we announced at WWDC. I couldn't be happier with it. The developer tools around ARKit and AR in general that I went through earlier, lots of interest there. Lots of interest from the Watch App Store, to the Catalyst that will be released with Mac OS Catalina, which allows developers quickly to port a iOS app to the Mac. We think, this is huge and so great for the user experience. And so you look at all of these and all the things that I talked about earlier, and I couldn't be happier with the reception that we're getting, and the work that is going on behind the scenes right now to ready — for the developers readying their apps for the fall.

Samik ChatterjeeJP Morgan — Analyst

Got it. If I can just follow-up on the China market. One of the things that we're looking at is with the going into the new year into 2020 there'll be a lot of 5G phones launching in that market from the Android players. How you think about the competitive landscape there as you enter next year?

Tim CookCheif Executive Officer

We don't comment on future products. With respect to 5G, it's — I think most people will tell you, it's, we're in sort of the extremely early, early innings of it, and even moreso on a global basis. So we couldn't be more proud of what our lineup is and we're excited about the great pipeline of both hardware and software, and we wouldn't trade our position for anyone's.

Nancy PaxtonSenior Director of Investor Relations

Thank you. Samik. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor, and by telephone. And the numbers to the telephone replay are 888-203-1112, or 719-457-0820. Please enter confirmation code 305-7347. These replays will be available by approximately 5:00 PM Pacific Time today.

Members of the press with additional questions can contact Kristin Huguet at 408-974-2414, and financial analysts can contact Tejas Gala or me with additional questions. Tejas is at 669-227-2402, and I'm at 408-974-5420. Thanks again for joining us.


[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Nancy PaxtonSenior Director of Investor Relations

Tim CookCheif Executive Officer

Luca MaestriChief Financial Officer

Amit DaryananiEvercore — Analyst

Shannon CrossCross Research — Analyst

Katy HubertyMorgan Stanley — Analyst

Krish SankarCowen and Company — Analyst

Wamsi MohanBank of America Merril Lynch — Analyst

Jim SuvaCitigroup — Analyst

Samik Cha tterjeeJP Morgan — Analyst

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