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| Thomson Reuters StreetEvents Event Brief | |
| E D I T E D V E R S I O N | |
| Q1 2020 Apple Inc Earnings Call | |
| JANUARY 28, 2020 / 10:00PM GMT | |
| ================================================================================ | |
| Corporate Participants | |
| ================================================================================ | |
| * Tejas Gala | |
| Apple Inc. - IR Contact | |
| * Luca Maestri | |
| Apple Inc. - CFO & Senior VP | |
| * Timothy D. Cook | |
| Apple Inc. - CEO & Director | |
| ================================================================================ | |
| Conference Call Participiants | |
| ================================================================================ | |
| * Krish Sankar | |
| Cowen and Company, LLC, Research Division - MD & Senior Research Analyst | |
| * Christopher Caso | |
| Raymond James & Associates, Inc., Research Division - Research Analyst | |
| * Amit Jawaharlaz Daryanani | |
| Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst | |
| * Kyle P. McNealy | |
| Jefferies LLC, Research Division - Equity Analyst | |
| * Samik Chatterjee | |
| JP Morgan Chase & Co, Research Division - Analyst | |
| * Shannon Siemsen Cross | |
| Cross Research LLC - Co-Founder, Principal & Analyst | |
| * Wamsi Mohan | |
| BofA Merrill Lynch, Research Division - Director | |
| * Thomas Ferris Forte | |
| D.A. Davidson & Co., Research Division - MD & Senior Research Analyst | |
| * Kathryn Lynn Huberty | |
| Morgan Stanley, Research Division - MD and Research Analyst | |
| * Michael Joseph Olson | |
| Piper Sandler & Co., Research Division - MD & Senior Research Analyst | |
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| OVERVIEW | |
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| Co. reported 1Q20 revenue of $91.8b, net income of $22.2b and diluted EPS of $4.99. Expects 2Q20 revenue to be $63-67b. | |
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| FINANCIAL DATA | |
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| 1. 1Q20 revenue = $91.8b. | |
| 2. 1Q20 net income = $22.2b. | |
| 3. 1Q20 diluted EPS = $4.99. | |
| 4. 1Q20 YoverY revenue growth = 9%. | |
| 5. 1Q20 GM = 38.4%. | |
| 6. 1Q20-end net cash = $99b. | |
| 7. 1Q20-end total debt = $108b. | |
| 8. 1Q20 share repurchase = 40m AAPL shares for $10b through open market transactions. | |
| 9. 2Q20 revenue guidance = $63-67b. | |
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| PRESENTATION SUMMARY | |
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| I. 1Q20 Review (T.C.) | |
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| 1. Highlights: | |
| 1. Thrilled to report Co.'s biggest qtr. ever, which set new all-time records in: | |
| 1. Revenue. | |
| 2. Earnings. | |
| 2. Revenue $91.8b. | |
| 1. Above high end of guidance range. | |
| 2. Revenue growth accelerated for third consecutive qtr. | |
| 3. Geographically, set all-time records in Americas, Europe and Rest of Asia Pacific. | |
| 1. Greater China returned to growth. | |
| 4. Record performance was fueled by iPhone, where Dec. qtr. revenue was up 8% YoverY and by fifth consecutive qtr. of double-digit growth outside of iPhone, including new all-time record for Services and another blowout qtr. for Wearables. | |
| 5. Active installed base of devices now surpassed 1.5b, up over 100m in last 12 months alone, reaching new all-time high for each main product categories and geographic segments. | |
| 1. Not only is large and growing installed base of powerful testament to satisfaction engagement and loyalty of customers, but it's fueling growth across the Board, particularly in Services. | |
| 2. iPhone: | |
| 1. [Dec. qtr. revenue $56b]. | |
| 1. Up 8% YoverY. | |
| 2. Exceptional demand for iPhone 11, iPhone 11 Pro and iPhone 11 Pro Max. | |
| 1. iPhone 11 was top selling model every week during Dec. qtr., and three new models were Co.'s three most popular iPhones. | |
| 3. Had double-digit growth in many developed markets, including US, UK, France and Singapore. | |
| 1. Grew double-digits in emerging markets, led by strong performances in Brazil, Mainland China, India, Thailand and Turkey. | |
| 2. These new models are by far the best iPhone's Co. ever shipped with advanced technologies and unprecedented leap in battery life to easily get through the day and best-in-class camera experience. | |
| 3. Has been wild with photos customers shared in all-new Night Mode photo challenge this month. | |
| 3. Services: | |
| 1. Revenue reached $12.7b. | |
| 1. All-time record. | |
| 2. Grew 17% over last year. | |
| 2. Saw double-digit growth in all five geographic segments. | |
| 1. Established new all-time records for multiple categories, including cloud services, music, payment services and App Store search ad business, and setting a Dec. qtr. record for App Store and Apple Care. | |
| 3. 2019 was historic year for Services business. | |
| 1. For App Store, 2020 started off strong with customers spending a new single day record $386m on New Year's Day alone, 20% increase over last year. | |
| 2. Apple Arcade, new game subscription service, has been fast off blocks with catalog of over 100 new and exclusive games which can't be found anywhere else, all playable across Apple devices with new games and expansions added every month. | |
| 3. Apple TV+ is off to rousing start. | |
| 1. Continued to focus on telling stories that matter like Little America, which recently premiered to widespread critical acclaim with much more great content still to come. | |
| 4. Apple News now draws over 100m monthly active users in US, UK, Australia and Canada and provides curated and personalized experience using on-device intelligence to recommend stories. | |
| 5. Apple News+ continues to add new titles, offering subscribers seamless access to world's top publications across all of their devices. | |
| 6. For Apple Pay, revenue and transactions more than doubled YoverY with run-rate exceeding 15b transactions a year. | |
| 1. Apple Pay transit support expanded with customers paying for journeys on Transport for London more easily with Apple Pay Express Transit. | |
| 7. In spring of 2020, iPhone and Apple Watch customers will be able to simply tap to ride trains and buses in even more cities, including Shenzhen and Guangzhou. | |
| 8. Thrilled with continued growth of Apple Card. | |
| 1. Last month, customers began using Apple Card monthly instalments at AAPL retail and online to purchase new iPhones and pay for them over 24 months. | |
| 4. Wearables: | |
| 1. Had another incredible qtr., setting all-time record in virtually every market Co. tracks worldwide. | |
| 1. This product category is now size of Fortune 150 co. | |
| 2. Demand for AirPods continues to be phenomenal, particularly for recently launched AirPods Pro, new addition to AirPods family that features active noise cancellation. | |
| 3. Apple Watch had great start to FY20, setting all-time revenue record during qtr. | |
| 1. It continues to have profound impact on customers' lives and continues to further its reach as over 75% of customers purchasing Apple Watch during qtr. were new to Apple Watch. | |
| 2. AirPods and Apple Watch were must have holiday gifts helping drive unprecedented results for category even as Co. faces supply constraints for Apple Watch Series 3 and AirPods Pro. | |
| 4. Mac and iPad generated $7.2b and $6b in revenue, respectively. | |
| 1. High level of customer satisfaction and loyalty for both products drove active installed base of Mac and iPad to new records in all geographic segments. | |
| 5. iPad: | |
| 1. Saw growth in key emerging markets like Mexico, India, Turkey, Poland, Thailand, Malaysia, the Philippines and Vietnam. | |
| 1. With current lineup of iPad Pro, iPad Air, iPad mini and iPad, along with new iPad OS, gives customers unparalleled tablet experience, integrating hardware, software and services in a way that only AAPL can. | |
| 6. Mac: | |
| 1. Exciting qtr. for Mac, as Co. launched most powerful notebook ever. | |
| 1. 16-inch MacBook Pro, and Mac Pro and Pro Display XDR, the most powerful tools Co. has ever put in hands of pros. | |
| 7. Other Details: | |
| 1. This qtr., opened a beautiful new store in Kawasaki, Japan. | |
| 1. Retail and online stores set an all-time record and delivered strong double-digit growth in iPhone. | |
| 2. Began 2020 with greatest product lineup ever. | |
| 3. In Nov., released a completely redesigned Everyone Can Code curriculum to help introduce more elementary and middle school students to the world of coding. | |
| 1. The new curriculum includes even more resources for teachers, a brand new guide for students and updated Swift Coding Club materials. | |
| 2. Nov. saw launch of new Research app, latest in ongoing effort to put future of health in hands of every user. | |
| 1. Customers in US can enroll on three landmark multiyear health studies that Co. is undertaking with leading academic and research institutions, the Apple Women's Health Study, the Apple Heart and Movement Study and the Apple Hearing Study. | |
| 2. Built user privacy into Research app from ground-up. | |
| 4. This qtr., announced $2.5b plan to help address housing availability and affording crisis in home state of California. | |
| 5. As Co. closes books on record-breaking Dec. qtr., already well underway on some new and exciting developments for future. | |
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| II. 1Q20 Financials (L.M.) | |
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| 1. Highlights: | |
| 1. Business and financial performance in Dec. qtr. were exceptional. | |
| 1. [Set new] all-time records for revenue, net income and EPS. | |
| 2. Revenue $91.8b. | |
| 1. Up $7.5b or 9% YoverY, in spite of $1b headwind from FX. | |
| 3. Geographically, established all-time revenue records in many major developed and emerging markets, including among others, US, Canada, Mexico, Brazil, UK, Germany, France, Italy, Spain, Poland, Thailand, Malaysia and Vietnam. | |
| 4. Products revenue $79.1b. | |
| 1. Up 8%, as iPhone returned to growth. | |
| 2. Had incredibly strong results in Wearables, where Co. set all-time records for Apple Watch and AirPods. | |
| 5. Services revenue grew 17% to new all-time record $12.7b with double-digit growth in every geographic segment, a new all-time records across portfolio. | |
| 2. GM: | |
| 1. 1Q20 38.4%. | |
| 1. Up 40 BP sequentially, driven by leverage from higher revenue, in spite of negative 60 BP impact from FX. | |
| 2. Products 34.2%. | |
| 1. Up 260 BP sequentially. | |
| 3. Services 64.4%. | |
| 1. Up 30 BP sequentially, driven by favorable mix. | |
| 3. Results: | |
| 1. Reported tax rate 14.2%. | |
| 1. Before discrete items, rate was 16.5%, exactly in line with guidance. | |
| 2. Favorable one-time item impacted rate by 230 BP. | |
| 2. Net income was all-time record at $22.2b, up $2.3b or 11% over last year. | |
| 3. Diluted EPS was all-time record at $4.99, up 19%. | |
| 4. Operating cash flow was strong $30.5b, improvement of $3.8b over a year ago. | |
| 4. iPhone: | |
| 1. Revenue $56b. | |
| 1. Grew 8% YoverY, as Co. saw great customer response to launch of newest iPhones. | |
| 2. Set all-time revenue records in several countries, including US, Mexico, UK, France, Spain, Poland, Thailand, Malaysia and Vietnam. | |
| 2. Active installed base reached all-time high and is growing in each geographic segments. | |
| 1. In US, latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 98% for iPhone 11, 11 Pro and 11 Pro Max combined. | |
| 2. Among business buyers planning to purchase smartphones in next qtr., 84% plan to purchase iPhones. | |
| 5. Services: | |
| 1. Set all-time revenue record of $12.7b, with double-digit growth in all five geographic segments. | |
| 1. Established new all-time records for Apple Music, cloud services, payment services and App Store search ad business, and Dec. qtr. records for App Store and Apple Care. | |
| 2. Well on way to accomplishing goal of doubling [FY16] Services revenue during 2020. | |
| 1. Already reached that goal on run rate basis with results of Dec. qtr. | |
| 2. Customer engagement in ecosystem continues to grow. | |
| 1. Number of transacting and paid accounts on digital content stores reached new all-time high with paid accounts growing double-digits in all geographic segments. | |
| 1. Now has over 418m paid subscriptions across services on platform, up 120m from a year ago. | |
| 2. At this point, expects to hit goal of surpassing 500m mark already during March qtr. | |
| 3. Given tremendous momentum Co. is experiencing across Services offerings, increasing target for paid subscriptions and aims to reach 600m before end of calendar 2020. | |
| 4. App Store revenue grew strong double-digits. | |
| 1. Robust customer demand for in-app purchases and subscriptions. | |
| 2. Third-party subscription business grew across multiple categories, and increased almost 40% YoverY. | |
| 5. First-party subscription services continued to perform extremely well. | |
| 6. Apple Music set all-time revenue record, offering a catalog of over 60m songs to customers. | |
| 7. iCloud generated all-time revenue record, growing strong double-digits, while offering customers safe, secure and seamless experience across all their devices. | |
| 8. It was Dec. qtr. record for Apple Care. | |
| 6. Mac & iPad: | |
| 1. Mac revenue was $7.2b and iPad revenue was $6b. | |
| 1. Both products had difficult YoverY comparison due to launches of MacBook Air, Mac mini and iPad Pro during Dec. qtr. a year ago and subsequent channel field. | |
| 2. Despite tough compare on demand basis, performance for Mac and iPad was around even to last year. | |
| 3. Around half of customers purchasing Macs and iPads around the world, during the qtr. were new to that product. | |
| 4. Active installed base for Mac and iPad reached new all-time high. | |
| 5. Most recent surveys from 451 Research measured 93% customer satisfaction rating for iPad from consumers and 92% from businesses. | |
| 1. Among consumers and businesses, planning to purchase tablets in March qtr., 78% plan to purchase iPads. | |
| 7. Wearables, Home & Accessories: | |
| 1. Established new all-time record with revenue of $10b, up 37% YoverY with strong double-digit performance across all five geographic segments and growth across Wearables, Accessories and Home. | |
| 2. Set all-time records for Wearables in virtually every market Co. tracks, even as it experienced some product shortages due to strong customer demand for Apple Watch and AirPods during the qtr. | |
| 3. Continued to see strong demand for products in enterprise market, as technology solutions enabled businesses to do their best work. | |
| 1. 100% of Fortune 500 companies in healthcare sector use AAPL technology in areas like patient experience, clinical communications and nursing workflows. | |
| 2. Seeing smaller companies in this sector drive innovation with technology and apps. | |
| 1. One example is Gauss Surgical, which uses Core ML in iOS to more accurately estimate blood loss during childbirth and surgery. | |
| 2. This helps clinicians have more complete and timely information on whether a patient needs an intervention, which can impact both clinical outcomes and costs. | |
| 3. Another example is Butterfly Network, a medical imaging co., which makes handheld ultrasound device that connects to iPhone or iPad to enable clinicians to take an ultrasound anywhere at a cost that is dramatically lower than other solutions on market today. | |
| 8. Cash Position: | |
| 1. 1Q20-end cash plus marketable securities, [$207b]. | |
| 2. Issued [EUR2b] denominated green bond, retired $1b of maturing debt and reduced commercial paper by $1b during qtr., leaving Co. with total debt $108b. | |
| 3. 1Q20-end net cash $99b. | |
| 1. Maintains target of reaching a net cash neutral position over time. | |
| 4. Returned nearly $25b to shareholders during Dec. qtr. | |
| 1. Began $10b accelerated share repurchase program in Nov., resulting in initial delivery and retirement of 30.4m shares. | |
| 5. Repurchased 40m AAPL shares for $10b through open market transactions. | |
| 1. Paid $3.5b in dividends and equivalents. | |
| 9. 2Q20 Outlook: | |
| 1. Revenue $63-67b. | |
| 1. Wider than usual revenue range comprehends uncertainty related to recently unfolding public health situation in China. | |
| 2. GM 38-39%. | |
| 3. OpEx $9.6-9.7b. | |
| 4. OI&E about $250m. | |
| 5. Tax rate about 16.5%. | |
| 10. Others: | |
| 1. On 01/28/20, Board of Directors declared cash dividend of $0.77 per share of common stock, payable on 02/13/20 to shareholders of record as of 02/10/20. | |
| ================================================================================ | |
| QUESTIONS AND ANSWERS | |
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| Operator [1] | |
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| Yes. That will be from Amit Daryanani with Evercore. | |
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| Amit Jawaharlaz Daryanani, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [2] | |
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| I guess first one for me. On Wearables, fairly impressive to see it's already a $10 billion business for you guys. Can you just touch on the growth that you see on the Wearables side? How much of the growth do you think is coming from first-time buyers of AirPods or Apple Watch versus folks that seem to be just upgrading the products that they have? Because it looks to us adoption rates are fairly low in your installed base so there should be a long runway, but love to just understand how you see the growth divided between those 2 buckets. | |
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| Timothy D. Cook, Apple Inc. - CEO & Director [3] | |
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| Yes. Amit, it's Tim. If you look at the Apple -- or the Wearables as a category within the Wearables, Home and Accessories revenue, Wearables grew 44%, so it was very strong, as you say. The -- both Apple Watch and AirPods did very well in terms of collecting new customers. Apple Watch, in particular, 75% of the customers are new to the Apple Watch, and so it's still very much selling to new customers at this point. | |
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| Amit Jawaharlaz Daryanani, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [4] | |
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| Perfect. And I guess, Luca, if you could just touch on gross margins. The March quarter guide, I think, implies gross margins are flat to actually up 10, 15 basis points. It's rare for you guys to actually guide gross margins up in March, I think, because you have a fairly high seasonal sales deleverage happening. So what are the offsets that's enabling what looks like a better-than-seasonal guide for gross margins? | |
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| Luca Maestri, Apple Inc. - CFO & Senior VP [5] | |
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| Yes, that's right, Amit. It's about flat sequentially and, by the way, significantly higher on a year-over-year basis. But on a sequential basis, you're right. On one side, we got the loss of leverage from the usual seasonality, but we expect that, that loss of leverage will be offset by better mix and cost savings. | |
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| Tejas Gala, Apple Inc. - IR Contact [6] | |
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| Thank you, Amit. Can we have the next question, please? | |
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| Operator [7] | |
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| That will come from Tom Forte with D.A. Davidson. | |
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| Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [8] | |
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| Great. So congrats on the launch of Apple TV+. I wanted to know internally how you are gauging success. Is it purely on critical acclaim? Is it on number of consumers that are using the service, contribution of service revenue, et cetera, et cetera? | |
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| Timothy D. Cook, Apple Inc. - CEO & Director [9] | |
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| Tom, it's Tim. We are primarily measuring ourselves on the number of subscribers. As you can tell from the way that we launched the product, we started with a very aggressive price at $4.99. And in addition to that, we have our bundle, where if you buy pretty much any device, you're getting a year for free, and so we're very focused on subscribers. That said, our -- the product itself is about storytelling. And we think if we do that well, then we'll find that there will be some number of those that will also be critically acclaimed and we're seeing that with The Morning Show. We're seeing that with Little America and others. | |
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| Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [10] | |
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| Great. And then my second question is, I think you indicated that last month, you started offering consumers the ability to use their Apple Card to buy an iPhone on an installment basis. Can you talk about how that's had an impact on your unit sales for iPhones? | |
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| Timothy D. Cook, Apple Inc. - CEO & Director [11] | |
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| The retail stores did fantastic on iPhone, very strong double-digit growth in iPhone from a year-over-year point of view. And one of the factors that enabled that was the -- getting to monthly payments on the Apple Card to make it very simple. Of course, that's U.S.-only at this point, but the U.S. is a very key market for us. And so it was an important part of it. | |
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| Tejas Gala, Apple Inc. - IR Contact [12] | |
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| Thank you, Tom. Can we have the next question, please? | |
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| Operator [13] | |
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| That will come from Shannon Cross, Cross Research. | |
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| Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [14] | |
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| I wanted to go back to revisit China. Tim, can you talk about what you're seeing in the region -- what you were seeing in the region prior to the health crisis? And then can you also update us a bit in terms of your manufacturing strategy, dual sourcing, geographic diversification even within the region just so we have some idea of how this will be managed? | |
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| Timothy D. Cook, Apple Inc. - CEO & Director [15] | |
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| Yes. Thanks, Shannon. In terms of China, the results from last quarter and then I'll get into the coronavirus second. For the results from last quarter, we had double-digit growth for iPhone in Mainland China, so that was an important change from where we had been running. We also had double-digit growth in Services in Mainland China, and we had extremely strong double-digit on Wearables. And so really, there were a number of different factors. | |
| In terms of the things that customers are responding to, iPhone 11 is doing particularly well there. The product has been very well received with its battery life, and the camera is unbelievable. We also, as you probably know, have certain trade-in programs going and financing programs. These have also been well-received. And so it's sort of the sum of all of this, and we're attracting quite a large percentage of new customers on products like the Mac. 3/4 of the customers buying a Mac in China are new, and nearly 2/3 of the customers buying iPad are new. And so it was a terrific quarter. We had 3 of the top 4 selling smartphones in urban China according to Kantar. | |
| In terms of the coronavirus, as I mentioned earlier, first and foremost, our thoughts are with all of those that are affected across the region. And as I've mentioned, we're donating to groups that are working to contain the outbreak. We're also working very closely with our team and our partners in the affected areas, and we have limited travel to business-critical situations as of last week. The situation is emerging, and we're still gathering lots of data points and monitoring it very closely. As Luca had mentioned, we have a wider-than-usual revenue range for the second quarter due to the greater uncertainty. | |
| I'll talk about supply chain and customer demand some to give you some color. With respect to the supply chain, we do have some suppliers in the Wuhan area. All of these suppliers, there are alternate sources, and we're obviously working on mitigation plans to make up any expected production loss. We factored our best thinking in the guidance that we provided you. | |
| With respect to supply sources that are outside the Wuhan area, the impact is less clear at this time. The reopening of those factories after Chinese New Year has been moved from the end of this month to February 10, depending upon the supplier location. And we've attempted to account for this delayed start-up through our larger range of outcomes that Luca mentioned earlier. | |
| With respect to customer demand and sales, we've currently closed 1 of our retail stores, and a number of channel partners have also closed their storefronts. Many of the stores that remain open have also reduced operating hours. We're taking additional precautions and frequently deep cleaning our stores as well as conducting temperature checks for employees. While our sales within the Wuhan area itself are small, retail traffic has also been impacted outside of this area across the country in the last few days. And again, we have attempted to account for this in our guidance range that we've provided you. I hope that gives you some color. | |
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| Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [16] | |
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| Yes, that was really helpful. Luca, maybe if you could just touch on, from a gross margin perspective, the commodity pricing environment and availability. Obviously, there's been some movement on DRAM and NAND. So if you can talk about how you're thinking about inventory levels and managing that going forward. | |
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| Luca Maestri, Apple Inc. - CFO & Senior VP [17] | |
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| Yes. As I said earlier to the question around the gross margin guidance for the March quarter, we are seeing a benign commodity environment. Most commodities have been declining during the December quarter, and we expect the same to happen in the March quarter. As always and as you probably know, we look at the way these prices move. And at times when we feel it's appropriate, we buy certain commodities in advance. And so we will continue that practice as we go through the year. | |
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| Tejas Gala, Apple Inc. - IR Contact [18] | |
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| Thank you, Shannon. Can we have the next question, please? | |
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| Operator [19] | |
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| That will come from Katy Huberty with Morgan Stanley. | |
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| Kathryn Lynn Huberty, Morgan Stanley, Research Division - MD and Research Analyst [20] | |
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| Luca, can you address the modest slowdown in Services growth this quarter, 17% versus 18% in September? Which Services categories accelerated versus where did you see some deceleration in the growth? | |
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| Luca Maestri, Apple Inc. - CFO & Senior VP [21] | |
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| Katy, let me make a couple of comments here. The 17% during the December quarter, we look at it against our fiscal year '19 growth rate, which was 16%, so we feel very good about the results for the December quarter. As Tim and I mentioned during our prepared remarks, it was a very broad-based growth because we grew double digits in Services across all the 5 geographies. We set all-time records for many, many categories, music, cloud, search ads, payment services, December records for the App Store and AppleCare. | |
| If you remember, we had set 2 goals for ourselves in the Services segment. First, we set a goal to double our fiscal '16 revenue during 2020, and when we look at it on a run rate basis, we've already achieved that goal with the results for the December quarter. We also set a goal to pass 500 million paid subscriptions during 2020. And given that we are already at 480 million at the end of December, we expect to pass that mark during the March quarter. And so now we are setting a new target for ourselves for paid subscriptions. And so we are now aiming to reach 600 million before the end of calendar 2020. | |
| So we feel that the Services business is growing incredibly well. Of course, we have launched new services very recently. For example, Apple TV+ just launched in November. And so while these services did not have a material impact in our December quarter results, we expect that over time, these are contributing to the growth of the Services business. But we feel very happy with the 17%. | |
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| Kathryn Lynn Huberty, Morgan Stanley, Research Division - MD and Research Analyst [22] | |
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| Tim, as a follow-up, at some point in the future, Apple will launch a 5G iPhone. How big of a demand driver do you view 5G capability in a handset? And what's your view as to what the killer app will be from a consumer perspective? | |
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| Timothy D. Cook, Apple Inc. - CEO & Director [23] | |
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| We don't comment on future products, and so I'll try to sidestep a bit. With respect to 5G, I think it's -- and we're in the early innings of its deployment on a global basis. We obviously couldn't be prouder of our lineup and is -- and are very excited about our pipeline as well and wouldn't trade our position for anybody. | |
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| Operator [24] | |
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| We'll hear from Kyle McNealy with Jefferies. | |
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| Kyle P. McNealy, Jefferies LLC, Research Division - Equity Analyst [25] | |
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| So we're seeing some signs of new spectrum being deployed for 5G deployments and even additional 4G capacity, and it's already having a positive impact for handset upgrades to use that new capacity. Do you get the sense that wireless carriers are getting more incentivized to upgrade handsets to get leverage out of these new network investments? How much might this be helping? And do you think it will continue to accelerate? | |
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| Timothy D. Cook, Apple Inc. - CEO & Director [26] | |
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| I think that we've had some great partners not only in the U.S. but also around the world that were really helpful this quarter as partners. And so I think that probably a part of that is the level of investments they have, and then a part of it is probably making sure that those customers stick with them in an environment where there's a lot of trading back and forth. So I'm optimistic that it will continue. | |
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| Kyle P. McNealy, Jefferies LLC, Research Division - Equity Analyst [27] | |
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| Okay, great. And then the comment that you made about capacity in your Wearables division with AirPods Pro and Apple Watch 3, what should we think about the time line of when those capacity constraints might be alleviated? And will they come from capacity additions or the natural workout of kind of unit shipments and something on the demand side? | |
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| Timothy D. Cook, Apple Inc. - CEO & Director [28] | |
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| I'm hopeful that the Series 3 will come into balance during this quarter. On AirPods Pro, I don't have an estimate for that for you. I just can't predict when at this point where -- we seem to be fairly substantially off there, and we're working very hard to put in additional capacity. | |
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| Tejas Gala, Apple Inc. - IR Contact [29] | |
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| Thanks, Kyle. Can we have the next question, please? | |
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| Operator [30] | |
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| Yes. Wamsi Mohan, Bank of America. | |
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| Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [31] | |
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| Tim, Apple has a very valuable installed base of users. Can you see a future where Apple can become larger in the advertising market as you build out TV+, given you could have the unique position and ability to drive targeted ads to users without compromising on privacy? | |
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| Timothy D. Cook, Apple Inc. - CEO & Director [32] | |
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| I think it's -- I think it is possible to have advertising in a straightforward manner that doesn't encroach on people's privacy. I wouldn't want to conjecture about us in that business. I think for the TV+ business, we feel strongly that what that customer wants is an ad-free product, and so that's not our aversion to ads, it's what we believe that the customer wants. | |
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| Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [33] | |
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| Okay. And Luca, can you just clarify if the Services revenue this quarter had any impact of deferrals associated with TV+ at all? And how can you help us maybe size the impact of the amortization of the content cost associated with TV+ as we think about the next couple of years? | |
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| Luca Maestri, Apple Inc. - CFO & Senior VP [34] | |
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| Yes. So yes, of course, we launched the service, and so there was a very small contribution to revenue from the deferral. And there was also a contribution to revenue from the people, the subscribers that are actually paying for the service. When you think about what goes into the Apple TV+ revenue, at this point, there are 2 components: the paid subscribers, these are the customers that pay for the service and we recognize revenue over the subscription period; and then we've got the what we call the Apple TV+ bundle subscribers, these are the customers that buy an eligible hardware device and redeem the offer for a free year of TV+ services. We defer revenue for this offer based on 3 items. The first one is the value of the service that is being provided, the 1-year of Apple TV+. The second one is the number of customers that are eligible for the offer, and the third one is our estimate of the expected number of customers that will redeem the offer. So you need to keep in mind that from our total eligible device sales, you need to make a number of reductions for family sharing, for multiple device purchases and for geographic availability. Also the take rate can also be impacted by the availability of local content, and we also require a payment method on file. So this estimate is reviewed quarterly and gets updated based on actual trends of the offer. | |
| And so these inputs provide us with the amount of revenue that we defer for each device sale that then gets recognized over the 1-year period that the TV+ service is provided. And so when you take the combination of pay subscribers and bundled subscribers, you get the Apple TV+ revenue. Of course, because we launched the service very recently, the amount of revenue that we recognized during the quarter was immaterial to our results. | |
| With regard to the cost of the service, of developing the content, we -- essentially, as we incur these costs, we put them on the balance sheet, and then we amortize them over a certain period of time depending on the type of content that we produce. | |
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| Operator [35] | |
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| We'll hear from Cowen and Company's Krish Sankar. | |
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| Krish Sankar, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [36] | |
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| Congrats on the great results. I had 2 questions. First one, Tim, I just wanted to pick your brain a little bit on the overall smartphone market. There's a general view that when 5G phones come out, they're going to be more expensive due to higher component costs. But at the same time, it looks like you guys have proven that there is a market for low-cost geographies with phones like iPhone SE. So how do you see these 2 different segments within the smartphone market evolving over the next 1 to 3 years? And then I have a follow-up for Luca. | |
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| Timothy D. Cook, Apple Inc. - CEO & Director [37] | |
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| Again, I want to stay away from commenting about future products. But generally, I think it's important when you think about 5G is to look around the world at the different deployment schedules. And some of those look very different perhaps than what you might be seeing here. And so that's very important. In terms of the price, I wouldn't want to comment on the price of handsets that aren't announced. | |
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| Krish Sankar, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [38] | |
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| Got it. No worries, Tim. And then a follow-up for Luca. OpEx as a percentage of sales for March looks like about 15% higher than in your prior quarters. Kind of curious, how much of that, as part of it, is driven by some of your Intel modem asset purchases or TV+ in the OpEx? Or how do we think about it on a go-forward basis? | |
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| Luca Maestri, Apple Inc. - CFO & Senior VP [39] | |
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| Yes. I think we felt good about our OpEx results because they were at the low end of our guidance range. But clearly, we want to make all the necessary investments in the business. And from -- in terms of the new services, not only for TV+ but all the new services that we launched during 2019, this is a period where we're making the necessary investments in advertising and marketing, and that level of investment is reflected in our OpEx results. | |
| And also, as you correctly stated, we completed the acquisition of the Intel baseband business during the December quarter. And so we had -- we reflected the run rate of the expenses related to that business partially during the quarter after the completion of the transaction. And we -- that is a very important core technology for the company, so we will continue to make all the necessary investments also there. There is a third category of expenses that affected the December quarter and is the fact that our revenue was very strong, and we have certain variable expenses, for example, credit card fees that are associated with higher volume and, of course, impacted our OpEx results. | |
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| Tejas Gala, Apple Inc. - IR Contact [40] | |
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| Thanks, Krish. Can we have the next question, please? | |
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| Operator [41] | |
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| That will be from Mike Olson with Piper Sandler. | |
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| Michael Joseph Olson, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [42] | |
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| So a slightly different take on an earlier question on Wearables, and that is, what impact do you think Wearables is having on driving people into the Apple ecosystem? You mentioned 75% of watch buyers are new to the Apple Watch, but are many of them new to Apple overall? I'm sure a lot of existing iPhone, iPad or Mac users are going to be Wearables customers, but do you think Wearables bring people into the ecosystem to buy other devices in a material way? | |
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| Timothy D. Cook, Apple Inc. - CEO & Director [43] | |
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| I think that -- Michael, it's Tim. With each Apple product that a customer buys, I think they get tighter into the ecosystem because they like -- that's the reason that they're buying into it, is they like the experience, the customer experience. And so from that point of view, I think each of our products can drive another product. I would think in that case, it's more likely that the iPhone comes first, but there's no doubt in my mind that there's some people that came into the ecosystem for the Watch. | |
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| Michael Joseph Olson, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [44] | |
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| Yes. And then I think you recently mentioned that augmented reality will pervade our entire lives. And I'm wondering if you could share your thoughts about how you think it starts to impact our lives most significantly. For example, will the inflection point in AR come from gaming or industrial usage or some other category? In other words, where will the average person kind of first feel the impact of AR on their lives in a significant way? | |
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| Timothy D. Cook, Apple Inc. - CEO & Director [45] | |
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| I think when you look at AR today, you would see that there are consumer applications, there are enterprise applications. This is the reason I'm so excited about it, is you rarely have a new technology where business and consumer are both -- most see it as key to them. And so I think it's -- the answer is that that's the reason that I think it's going to pervade your life, is because it's going to go across both business and your home life. And I think these things will happen in parallel. There are already companies that are deep into the enterprise business that are working on applications for the enterprise. And of course, you can see -- you can go on the store and see thousands of apps that are ARKit-enabled at this time and with even more coming. | |
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| Tejas Gala, Apple Inc. - IR Contact [46] | |
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| Thank you, Mike. Can we have the next question, please? | |
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| Operator [47] | |
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| That will come from Raymond James' Chris Caso. | |
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| Christopher Caso, Raymond James & Associates, Inc., Research Division - Research Analyst [48] | |
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| I guess the first question is on gross margins, and you spoke about the favorable mix. Wondering if you could expand on that a little bit. And clearly, iPhone is doing well within the overall mix, growing year-on-year. But if you could talk about what's happening to the mix within iPhone. Is that improving as well and also helping margins? And is there anything else you would point to with regard to the overall mix in margins? | |
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| Luca Maestri, Apple Inc. - CFO & Senior VP [49] | |
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| Yes. I think that the mix helped us both in Q1, and it's helping us with the guidance for Q2. And as you said, some of it is mix of iPhones. The customer response for iPhone 11, 11 Pro and 11 Pro Max has been exceptional, and that clearly has helped our mix. iPhone 11 was our top-selling model throughout the quarter, every single week of the quarter. And so certainly, better mix within iPhone. | |
| The other point that I'd like to point out is that as we move from Q1 to Q2, the proportion of revenue coming from Services increases versus the holiday quarter. And given the fact that Services are accretive to gross margin for the company, we end up getting a better mix from Services as well. | |
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| Christopher Caso, Raymond James & Associates, Inc., Research Division - Research Analyst [50] | |
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| Okay. And I guess a follow-on question with regard to OpEx, and it has been growing at a faster rate than revenue for, I guess, largely over the last 3 years or so. Can you set us some expectation with regard to when you get a return on that investment? I understand there are new investments that are happening now. But how should we think about potential leverage going forward? Is there a point in time where the OpEx spending tend to level off and you get some return on that? Or is it just a function of faster revenue growth in the future? | |
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| Luca Maestri, Apple Inc. - CFO & Senior VP [51] | |
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| Well, I would start by saying that our expense to revenue ratio is incredibly competitive relative to other companies in our sector. There are years when our OpEx grows faster than our revenue, but we've also had years in the recent past where the opposite has happened. We continue to believe that we have a lot of great opportunities in front of us. And just if you look at this past year, we launched many new initiatives, for example, on the Services front, which we want to support with the appropriate level of investment, not only marketing and advertising but also in R&D. | |
| As I mentioned earlier, we closed the acquisition of the Intel baseband business because we think it's a very important strategic core technology for the company going forward. And I think from the results that you've seen during this quarter and the guidance that we provided during -- for the March quarter, I think we're doing a pretty good job at balancing the level of investments that we are making on the expense front with the level of returns that we get, both in terms of revenue and in terms of profitability that we're getting. Our net income, for example, was up 11% during the December quarter. | |
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| Tejas Gala, Apple Inc. - IR Contact [52] | |
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| Thank you. Can we have the next question, please? | |
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| Operator [53] | |
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| That will come from Samik Chatterjee with JPMorgan. | |
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| Samik Chatterjee, JP Morgan Chase & Co, Research Division - Analyst [54] | |
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| Just wanted to kind of ask on the iPhone revenue growth and definitely good to see it return to growth. Based on the velocity or momentum you're seeing for the products exiting the quarter, how comfortable are you feeling about sustaining growth in iPhone revenues through the year? And I have a follow-up. | |
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| Timothy D. Cook, Apple Inc. - CEO & Director [55] | |
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| We have a practice of forecasting the current quarter, and so we've given you the range that we expect for the current quarter and really don't give a range beyond that. | |
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| Samik Chatterjee, JP Morgan Chase & Co, Research Division - Analyst [56] | |
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| Okay. So if I can just maybe then follow up in terms of, obviously, you've returned to growth in most of the regions you report. One of the regions that are declining is Japan, so if you can share your thoughts on what actions you need to take there to return that segment -- that geography to growth. And what are the product trends there? What's probably the headwind that's kind of limiting growth there? | |
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| Luca Maestri, Apple Inc. - CFO & Senior VP [57] | |
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| Yes. So Japan was down 10% during the December quarter, was primarily due to iPhone performance, which was challenged because there were some regulatory changes that took effect on the 1st of October, where essentially, the regulators decoupled the mobile phone pricing from the 2-year contracts and are capping the maximum amount of carrier discounts that can be made. At the same time, I would say, within a more difficult macro environment, iPhone did incredibly well during the quarter. 6 of the top 7 selling smartphone models in Japan during the December quarter were iPhones. So it was a very strong performance by iPhone in a difficult environment. | |
| Also, in Japan, we had very strong double-digit growth from Services, stronger than company average, and very strong double-digit growth in Wearables, also stronger than company average. So we feel very good. Japan is a country where it's starting to -- we've had great success. The customers are very loyal and very engaged, and we have a very strong position there, and we feel we have a very good momentum. | |
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| Tejas Gala, Apple Inc. - IR Contact [58] | |
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| Thank you, Samik. A replay of today's call will be available for 2 weeks on Apple Podcasts, as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are (888) 203-1112 or (719) 457-0820. Please enter confirmation code 6826206. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at (408) 974-2414. Financial analysts can contact me with additional questions at (669) 227-2402. Thank you again for joining us. | |
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| Operator [59] | |
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| Again, that will conclude today's conference. Thank you all for your participation. | |
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