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Home / Apple / This is Tim: Transcript of Apple's third quarter analytics call in 2019

This is Tim: Transcript of Apple's third quarter analytics call in 2019



[ Here is a full print of Apple's quarterly phone call with analysts after it released its third quarter financial results for 2019. ]

Tim Cook's opening statement

Good afternoon and thanks to everyone you to join 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, an absolute blowout quarter for Wearables, where we saw an accelerating growth of well over 50 percent, and a new high watermark for services that we set an all time record of $ 1

1.5 billion. Going back and considering Wearables and Services together, two areas where we have invested strategically 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 growth back to mainland 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 one and a half billion dollars of revenue. In constant currency, our revenues grew in all five geographical segments.

For the iPhone, we generated $ 26 billion in sales. Although this is down 12 percent from last year's June quarter, it is a significant improvement to the 17 percent 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 trade-in and financing programs. In fact, the iPhone in our stores and online stores returned to growth on a year by year basis in the month of 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.

Revenues excluding the iPhone increased by 17 percent from last year, with growth in all categories. From services, we are constantly generating record revenue of $ 11.5 billion. This is 13 per cent more than the year before, and if we exclude the favorable one-off item of $ 236 million from June last year, service growth was 15 per cent, or 18 per cent in constant currency, which is in line with our second quarter. Our strong service was broadly based. We constantly set new records 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 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 percent year on year.

We have seen our success be driven by several factors. First, the fact that we have been able to integrate content from over 150 leading content providers all in one place. Second, the same ease of use and the unmatched user interface that sets Apple apart in other categories, including TV. And third, we benefit from a broader secular move to over-the-top services.

We work on this 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 one hundred thousand iTunes movies and TV shows; App Store, where users can find their favorite streaming services; and later this year, our original programming service, Apple TV +.

Apple Pay now completes nearly 1 billion transactions per month, more than double its volume a year ago. 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 travel provider. As I said before, transit integration is an important driver for a wider digital wallet adoption, and we're going to continue with this pressure to help users leave their wallets at home in more and more cases.

On a related note, thousands of Apple employees use the Apple Card every day in our beta test, and we plan to begin rolling out the Apple Card in August.

As I mentioned in the beginning, it was a new startling quarter for Wearables, with growth accelerating to well over 50 percent. 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 percent of customers who bought Apple Watch in June quarter bought their first Apple Watch.

We continue to see phenomenal demand for AirPods. And when you summarize the last four quarters, our laptop business is now greater than 60 percent of Fortune 500 companies.

We had good results from iPad, with sales of over $ 5 billion, and growth driven by iPad Pro and with strong customer response on new iPad Mini and iPad Air. This was our third consecutive quarter of growth, and with revenues up 15 percent so far today, we feel good about where we're headed 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 double-digit Mac growth, driven by a strong performance of MacBook Air and MacBook Pro. Looking ahead, there is a great deal to enjoy for Mac. On the heels of the Mac mini and iMac updates earlier in the fiscal year, we brought important updates to the bulk of our laptop series over the past few months. We now have a $ 999 MacBook Air which is a killer for students.

And for our professional users, pushing the limits of what a Mac can do, we were excited to unveil the most powerful Mac ever, the new Mac Pro and the all-new Pro Display XDR, which will be available this fall. Designed for maximum performance, expansion and configurability, and at cutting-edge prices, they are the most powerful tools Apple has ever put into the hands of professional customers.

The Mac ecosystem as a whole is getting a big boost. At our recent Worldwide Developer Conference, we announced a game-changing tool to help developers customize their iOS and iPadOS apps for Mac. I have 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.

To turn 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 look at this as a great opportunity to work with some of the leading talent in this field, to expand our portfolio of wireless technology patents to over 17,000, to accelerate the development of our future products and 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 dramatic new look with Dark Mode while providing major 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 Sign 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 across 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 second screen 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, iCloud photos and videos and an app Save 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 like alerts that warn of high decibel noise to protect your hearing, and bike tracking to help you make women's health decisions. In the June quarter, we expanded the availability of the ECG app and notified irregular rhythm to five 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 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 noted earlier, we believe macOS Catalina will be a breakthrough in the Mac ecosystem. A new tool included in macOS 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 wave of popular apps coming to Mac as early as this fall.

Again, it's worth taking a step back and digesting the bigger picture here. These updates are the latest steps in a broader strategic effort to make the user experience across iOS, macOS, iPadOS, watchOS and tvOS easier and more intuitive. Apple is alone in offering this type of value and ecosystem to its customers. And these devices and their platforms are unmatched in usability, their seamlessness and their privacy and security. And while we deliver these things, we've created a dynamic environment where developers benefit greatly from creating and distributing on these platforms. And of course, our customers benefit greatly from access to all this creativity and innovation.

We've also unveiled other exciting technologies to make it easier and faster for developers to create powerful new apps. Swift UI provides an intuitive new framework for building sophisticated user interfaces across our software platforms using simple user-friendly code. CoreML 3 supports the acceleration of several types of advanced real-time machine learning models, and CreateML allows developers to build machine learning models without writing code.

We have the world's largest augmented reality-enabled platform and thousands of ARKit-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 on-device, real-time machine learning to recognize the human form and seamlessly integrate people into AR experiences. RealityKit is a new developer framework built from the ground up to provide all the tools and technologies required to make AR objects virtually lifelike. And Reality Composer brings AR content creation to tens of millions of developers who have no 3D experience. Our developers are already running these new technologies, and we believe our customers will love some of the apps that these creators have in store for months to come.

On so many fronts, there is a huge amount to look forward to over the next few months, including the launch of new services such as Apple Arcade, Apple TV + 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 June, I will transfer the call to Luca.

Apple CFO Luca Maestri Opening Statement

Thanks, Tim. Good afternoon everyone.

We are pleased to report a sales record of $ 53.8 billion in June, up 1 percent from a year earlier. We are returning 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.

In total, product revenue was $ 42.4 billion, down 2 percent year over year, which is significantly better than the 8 percent decline in product revenue we experienced during the first half of the fiscal year. Product categories outside the iPhone grew by 20 percent, with strong results in Wearables, Mac and iPad. Service revenues grew by 13 percent to a new all-time record of $ 11.5 billion. Excluding the one-off item we highlighted a year ago in connection with the final resolution of various lawsuits, revenue growth in services was 15 percent and 18 percent in constant currency terms.

On a geographical basis, we saw a marked improvement in comparisons from emerging markets compared to the first half of this fiscal year, particularly in the BRIC countries, where year-on-year earnings went from a 25 percent decline in revenue in the first half to 3 percent growth in the 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 mainland China growth, 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 percent, flat in order and in line with our guidance. The product's gross margin was 30.4 percent lower, about 80 basis points in succession, due to seasonal loss of leverage and product mix partially offset by favorable costs. The gross margin of the service was sixty four points one percent, up 30 basis points sequentially, mainly due to a favorable mix. Net income was NOK 10 billion, diluted earnings per share was $ 2.18. And cash flow for operations was $ 11.6 billion.

Let me elaborate on each of our revenue categories. iPhone revenue was $ 26 billion, down 12 percent from a year ago. This was significantly better for the year over the year than for the 17 per cent decline in the previous quarter, with a sequential improvement this year compared to 15 of our 20 best 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, iPhone indicates 99 percent customer satisfaction for iPhone 10R, iPhone 10S and 10S Max combined. Among business buyers planning to buy smartphones in the September quarter, 83 percent 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 revenues, setting 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 percent of Apple revenue and 36 percent 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 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 grew by over 40 percent, and across all third-party subscription apps, the largest accounted for only 0.25 percent of total services.

Among our many service registrations, it was our best quarter ever for AppleCare. We are seeing an increase in attachment rates for service contracts and expanding distribution of AppleCare through our partners. We recently expanded our authorized service provider network, and nearly 1,000 Best Buy stores in 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 Apple stores, there are over 1,800 third-party licensed Apple vendors in the United States, which are three times as many locations as three years ago.

Next time I'll talk about the Mac. Revenue was NOK 5.8 billion, an increase of eleven per cent compared with 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 development significantly outperformed the global PC industry. Almost half of the customers who purchased Macs during the quarter were new to Macs, with sales growth in both developed and emerging markets and the active installed base of Macs reaching a new high again.

We also had good results for the iPad, with revenue of $ 5 billion, up 8 percent. Revenue grew in all five of our geographical segments, with a third-quarter revenue record in mainland 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 the iPad, and the iPad's active installed base also reached a new all-high. The latest 451 Research surveys measured a 94 percent consumer satisfaction rating for iPad from consumers, and among corporate customers planning to buy tablets in the September quarter, 75 percent planned to buy iPads.

Wearables, Home and Accessories revenue accelerated in all of our geographical segments, growing 48 percent to over $ 5.5 billion, setting a record for the quarter in June. This growth was primarily driven by the strong performance of our portable business, which was up over 50 percent 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 deliver their best revenue in the June quarter ever, with double-digit sales growth across Apple Watch, iPad, Mac and accessories. Our provider program shows great speed, with more than five times the number of iPhones purchased compared to a year ago. We opened fantastic new stores in the Carnegie Library in Washington D.C. and the busy Shinji 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, next to our online store presence in 35 countries.

In the corporate market, we get a grip on our strategy of transforming 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 hundred banks by asset size 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 percent of the largest banks support iPads for asset managers. In the retail bank, two-thirds of the top banks use the iPad for branch conversion and the modernization of 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 T.D. Ameritrade has launched Apple Business Chat as a dynamic way to support and interact with customers. The Messaging on iOS messaging interface enables rich communication between customers and contact center staff. T. D. Ameritrade has also become the first broker in the world to enable instant account financing using Apple Pay, eliminating the two to three business days it used to fund bank transfer accounts.

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 are continuing 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 Apple shares, and three points of $ 6 billion in dividends and equivalents.

As we move on to 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 and $ 64 billion. This guide includes nearly $ 1 billion negative currency impact year on year. We expect the gross margin to be between 37.5 and 38.5 per cent. We expect OpEx to be between $ 8.7 and $ 8.8 billion. We expect OINE to be around $ 200 million, and we expect our tax rate to be around 16.5 percent. Even today, our Board of Directors has declared a cash dividend of SEK 77 per share of common share payment on August 15, 2019 to shareholders with record stock from August 12, 2019.

With that I want to open the conversation to questions.

Questions and Answers

Amit Daryanani, Evercore : When I think of the September quarter guide, I understand that I'm thinking 16 percent or so in order. Historically, at least this guide has been in the 10 percent low two-digit type range. Only you can help us understand, which gives you confidence in a better than seasonal guide in September, whether geo or product bases would be useful.

Luca Maestri : Amit, 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 percent in the June quarter, or actually over 50 percent in the June quarter. We set a record for our service business in June. And then, you know, these two categories have become very important and very big for us. And then as we continue to grow, it will definitely help us as we go through the year. Keep in mind that the guidance includes an estimated $ 1 billion upwind for the quarter.

Amit Daryanani, Evercore : Fair enough. It is very useful. And I guess if I just follow up China, impressed to see the continued improvement you will see, despite all the headlines out there. Just curious, you know, what are the few things that drive China's success, and how sustainable do you think the changes are for Apple as you progress.

Tim Cook : Hi, it's Tim and I apologize for my voice. I suffer from an allergy. But what happened last quarter in China was a coincidence of things. The government's stimulus, this came in the form of a VAT reduction, very bold. We took some price actions, put 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 over the quarter. And when you look at it, each of our categories, iPhone, iPad, Mac, Wearables, Services, improved, one after the other. So we couldn't be happier with the progress. I would like to point out, 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.

Shannon Cross, Cross Research : Can you talk a little bit about what's going on in services, some of the set and take? Luca, you gave us some color in terms of the growth rates in it, but I'm just curious – and I know you don't want to talk about future products – but when you think about the opportunity, you think about what you & # 39; We have got now and in the future, and then some of that has happened to China, and this is something that can increase again, or again, 18 percent on a constant currency basis is obviously quite strong. But, how do you think about it?

Luca Maestri : Yes, I think it's important to start with the 18 percent in constant currencies, Shannon. Our reported results have been normalized, removing the one-off item from 15 per cent last year. Obviously, FX, you know, plays a role around the world, 300 basis points for FX influence during the June quarter. Despite this, there was a record income at all times. Our installed base continues to grow. It grows in every geography, and it grows in all of our major product categories, and it's very, very important for service business.

I want to say, I want to give you a little more color around two compensating factors around this performance during the June quarter. On the one hand, the App Store – I mentioned in my prepared comments that growth accelerated sequentially. We had double-digit growth on the App Store in each geography. In China, we saw significant acceleration. As you know, we tend to make money in China on the App Store through game titles, and the government has approved some important gaming titles during the quarter. It has helped our performance there. On the other hand, AppleCare – I mentioned that AppleCare was a record time in June, so really strong performance, but our growth has slowed in AppleCare due to factors we fully expected, as we offset this expansion of our coverage for AppleCare as we have had, we have had significant success over the last 18 to 24 months in really expanding our coverage of AppleCare around the world with some key partners, carriers and resellers, and obviously as we go through the year these companies become a little more difficult .

Having said all this, you know that we have set ourselves a few goals, and we feel very confident in achieving those goals. The first is that we wanted to double the size of the service business from the financial year 2016 to 2020. We are on our way there. Paid subscription is another goal, is important to us. It is an important way for us to make money from our ecosystem. We set a target of exceeding half a billion paid subscriptions to the ecosystem by 2020. We are already at 420 million now. So we feel safe there, and of course as we mentioned, we are very excited to be launching new services soon. As Tim said, we will start rolling out the Apple Card in August, and there are two more very important services that we will add to our portfolio this fall. Den ene er Apple Arcade, som er vår spillabonnementstjeneste, og deretter selvfølgelig Apple TV + som er vår videostreaming-tjeneste. Så tydeligvis vil disse tjenestene hjelpe oss å fortsette med det momentumet vi hadde i tjenestene.

Shannon Cross, Cross Research : Dette er sannsynligvis også for deg, Luca. Kan du snakke om bruttomargin? Veiledningen var ganske solid. Det er klart det er forskjellige ting som spilles her. Jeg vet at du nevnte en effekt på topp milliarder dollar, tror jeg, valuta i forrige kvartal. Then maybe if you can kind of talk about what went into your your gross margin guidance.

Luca Maestri: 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.

Katy Huberty, Morgan Stanley: 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 seemed 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 in the business and if it at all informs your outlook around the pace of the China business as you go into September.

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

Katy Huberty, Morgan Stanley: And then just on the App Store, 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 be more longer term in nature and really show up in in 2020?

Luca Maestri: Let me let me just talk about the new services that we’ve announced in March, and then also about the timing of how we get to revenue, right? We’ve announced Apple News+, 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’s a trial period up front, there’s going to be different trial periods, we’ll see what that 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.

Krish Sankar, Cowen and Company: On the iPhone trade-in program, how effective was it and what percentage of iPhone sales came from the trade-ins and are there any other geographies where you are left to rule it out?

Tim Cook: 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 the combination of retail and online to growth in June and so we feel very good about the trajectory. We are obviously taking those programs and advocating those more widely, and that is at different levels of implementation throughout different geographies. Because we’re working with our carrier partners on those, and retail partners.

Krish Sankar, Cowen and Company: A much longer term question. I understand we’re in the very early innings of the services growth story. Is there a way to think about it down the road, three or five years down the road, would the services growth still be tethered to the hardware of the iPhone, or do you think at some point down the road services would be independent by itself and not really tied to your hardware installed base?

Tim Cook: Well there are elements today that are not necessarily tethered to iPhone, right? We have other products where people are both purchasing things, they’re watching Apple TV. We offer Apple Music on Android, and so there’s 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 into that, but more more broadly, to answer your question about growth as we go forward, the way I see it is, we have 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 work very hard to have loyal customers, and to continue attracting an impressive number of switchers. The installed base is growing, hit a new record, that’s obviously good. And it hit a 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 are in a 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 the 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’re very happy with that. We grew in Brazil as well. We’re 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’re placing big bets and bet that we have a big future, in addition to the health kinds of things that may 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 that aren’t hooked and some that some that are hooked not on current period sales, very much services are rarely connected on that today or at least not a high percentage by any means there. They’re more correlated to 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.

Wamsi Mohan, Bank of America/Merrill Lynch: Tim, the China trade situation remains sort of fluid over here and 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’ve looked at and considered in moving parts of production potentially out of China.

Tim Cook: 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 I view this is, the vast majority of our products are kind of made everywhere. There’s a significant level of content from 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. 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 U.S., we want to continue doing that. And so we’re working and investing currently in capacity to do so, because we want to continue to be here. Og det er det som ligger bak eksklusjonene. And so we’re explaining that and hope for a positive outcome.

Wamsi Mohan: Luca, maybe for you, there’s been some significant destocking of inventory in the first calendar half of this year in 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?

Luca Maestri: Yes, Wamsi, as you know we’re 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. Hope that that helps you with that.

Jim Suva, Citigroup: Tim, regarding the installed base comment you’ve made, which is quite encouraging, but yet when you look at the iPhone revenue year over year the past several quarters have been down. Can you help us bridge the gap of, how is the install base growing. Is it mostly because secondary users are the new ones coming into the system as people are holding more phones longer? And what does that user typically bring in with them or something unique relative to what we historically know? And then for Luca, you’ve been investing 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 at a point where now a lot of harvesting is going to happen, or do you kind of continue this relatively same investment that you’ve been doing for the future strategy.

Tim Cook: 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 to the iOS, macOS and so forth tents. It’s a function of the robustness of the secondary market, which we think overwhelmingly hits a incremental customer. And it’s a function still in the emerging markets, and somewhat developed markets to a lesser degree, of people new, that, you know, 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’re doing programs et cetera to try to increase that, because we think we wind up hitting a cost number that we don’t hit in another way. And the upgrades where people are holding onto their 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 Maestri: And Jim, on OpEx it obviously is very important for us to continue to invest in the business, particularly on the R&D side, because we will 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. Of course we’ll 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 next month, obviously they will require the appropriate level of marketing and advertising as we launch them to the general public.

When you look in total 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 be competitive and at the same time we will not under-invest in the business.

Samik Chatterjee, J.P. Morgan: I just want to start off with the announcement at WWDC around the independent App Store for the Watch. 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 that help you position wearables more formally into the health and fitness category.

Tim Cook: 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 ARin 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 MacOS 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 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 for the developers readying their apps for the fall.

Samik Chatterjee, J.P. Morgan: If I could just follow up on the China market, one of the things that we’re looking at is going into the new year into 2020 there’ll be a lot of 5G phones launching in that market from the Android players. How do you think about the competitive landscape there as you enter next year.

Tim Cook: We don’t comment on future products. You know, with respect to 5G, I think most people would tell you we’re in sort of the extremely early innings of it. And even more so 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.

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