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  • Good day, and welcome to the Apple Incorporated Third Quarter Fiscal Year 2018 Earnings Conference

  • Call.

  • Today's call is being recorded.

  • At this time for opening remarks and introductions, I would like to turn the call over to Nancy

  • Paxton, Senior Director of IR.

  • Please go ahead.

  • Good afternoon, and thanks to everyone for joining us.

  • Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri.

  • After that we'll open the call to questions from analysts.

  • (Forward-Looking Cautionary Statements) I'd now like to turn the call over to Tim

  • for introductory remarks.

  • Today we're proud to report our best June quarter revenue and earnings ever thanks to

  • the strong performance of iPhone, services and wearables.

  • We generated $53.3 billion in revenue, a new Q3 record.

  • That's an increase of 17% over last year's result, making it our seventh consecutive

  • quarter of accelerating growth, our fourth consecutive quarter of double-digit growth

  • and our strongest rate of growth in the past 11 quarters.

  • Our team generated record Q3 earnings per share of $2.34, an increase of 40% over last

  • year.

  • We're extremely proud of these results and I'd like to share some highlights with you.

  • First, iPhone had a very strong quarter.

  • Revenue was up 20% year-over-year and our active installed base grew by double-digits,

  • driven by switchers, first time smartphone buyers and our existing customers whose loyalty

  • we greatly appreciate.

  • iPhone X was the most popular iPhone in the quarter once again, with a customer satisfaction

  • score of 98% according to 451 Research.

  • Based on the latest data from IDC, iPhone grew faster than the global smartphone market,

  • gaining share in many markets including the US, Greater China, Canada, Germany, Australia,

  • Russia, Mexico and the Middle East and Africa.

  • Second, we had a stellar quarter in services which generated all-time record revenue of

  • $9.5 billion fueled in part by double-digit growth in our overall active installed base.

  • We feel great about the momentum of our services business and we're on target to reach our

  • goal of doubling our fiscal 2016 services revenue by 2020.

  • Our record services results were driven by strong performance in a number of areas and

  • I'd like to briefly mention just some of these.

  • Paid subscriptions from Apple and third parties have now surpassed $300 million, an increase

  • of more than 60% in the past year alone.

  • Revenue from subscriptions accounts for a significant and increasing percentage of our

  • overall services business.

  • What's more, the number of apps offering subscriptions also continue to grow.

  • There are almost 30,000 available in the App Store today.

  • The App Store turned 10 years old this month and we set a new June quarter revenue record.

  • The App Store has exceeded our wildest expectations, igniting a cultural and economic phenomenon

  • that has changed how people work, learn and play.

  • Customers around the world are visiting the App Store more often and downloading more

  • apps than ever before.

  • And based on third party research estimates, the App Store generated nearly twice the revenue

  • of Google Play so far in 2018.

  • The app economy is thriving and thanks to the App Store, it's generating jobs for tens

  • of millions of people around the world.

  • Our developers have earned over $100 billion from the App Store since its launch and we

  • couldn't be more proud of them and what they've accomplished.

  • We're hearing lots of developer excitement around our upcoming OS releases, which I'll

  • talk about more in a moment, and can't wait to see what they can come up with next.

  • We've experienced rapid growth in our App Store search ad service and as we announced

  • earlier this month, we are expanding our geographic coverage to Japan, South Korea, France, Germany,

  • Italy and Spain.

  • We're also seeing strong growth in many of the other services as well.

  • Just a few examples, Apple Music grew by over 50% on a year-over-year basis.

  • AppleCare revenue grew at its highest rate in 18 quarters, partly due to our expanded

  • distribution initiative.

  • Cloud services revenue was also up over 50% year-over-year.

  • Our communications services are experiencing record usage.

  • We've hit all-time highs for both the number of monthly active users of Messages and the

  • number of FaceTime calls made with growth accelerating from the March to June quarters.

  • Siri requests have already exceeded 100 billion so far this fiscal year, and the number of

  • articles read on Apple News more than doubled year-over-year.

  • Apple Pay continues to expand with well over 1 billion transactions last quarter, triple

  • the amount from just a year ago, with growth accelerating from the March quarter.

  • To put that tremendous growth into perspective, this past quarter, we completed more total

  • transactions than great companies like Square and more mobile transactions than PayPal.

  • Apple Pay is now live in 24 markets worldwide with over 4,900 bank partners and we look

  • forward to adding Germany later this year.

  • We're excited to share that in the US, eBay is beginning to enable its sellers to accept

  • Apple Pay and CVS Pharmacy and 7-Eleven will roll out Apple Pay acceptance in locations

  • nationwide this fall.

  • Transit is another important area of growth and Apple Pay can be used with iPhone and

  • Apple Watch to quickly and conveniently ride public transit in 12 metropolitan areas.

  • Apple Pay Cash, our peer-to-peer payment service, is already serving millions of customers across

  • the US less than eight months following its launch.

  • Our third highlight of the quarter is the outstanding results in wearables which comprises

  • Apple Watch, AirPods and Beats and was up over 60% year-over-year with growth accelerating

  • from the March quarter.

  • Our wearables revenue exceeded $10 billion over the last four quarters, a truly remarkable

  • accomplishment for a set of products that has only been in the market for a few years.

  • Apple Watch delivered record June quarter performance with growth in the mid 40% range,

  • and we're thrilled to see so many customers enjoying AirPods.

  • It reminds me of the early days of iPod when I started noticing white earbuds everywhere

  • I went.

  • A number of other notable events in the quarter, we expanded distribution of HomePod to three

  • additional markets and we added new immersive listening features with support for HomePod

  • stereo pairs and a new multi-room audio system.

  • In June, we hosted an extremely successful developers' conference that previewed many

  • major advances coming this fall to our four operating systems, iOS, macOS, watchOS and

  • tvOS.

  • Developer and customer reaction has been very positive and we have over 4 million users

  • participating in our new OS beta programs.

  • Starting with iOS 12, Siri will take a major step forward with Siri Shortcuts, which deliver

  • a new, much faster way to get things done and allow any app to work with Siri.

  • We believe this will make Siri even more useful and significantly expand its adoption.

  • We've also designed performance improvements across iOS 12 to make everyday tasks faster

  • and more responsive.

  • Camera launches up to 70% faster.

  • The keyboard appears up to 50% faster and apps can launch up to twice as fast.

  • We've always been about empowering users to get the most from our product, but not about

  • spending all of their time using them and so we're adding tools to iOS 12 to help our

  • customers understand and take control of the time both they and their families spend interacting

  • with their iOS devices.

  • Activity reports will provide information on the amount and nature of time spent on

  • iPhones and iPads and screen time will enable parents to monitor and limit their children's

  • activity from their own iOS devices using Family Sharing in iCloud.

  • Developers will be able to build even more intelligent apps with just a few lines of

  • code using the power of machine learning with Core ML 2 and Create ML.

  • We've also included our third release of ARKit in only one year.

  • With ARKit 2, iOS 12 will provide an even more powerful platform to make dynamic AR

  • apps, integrating shared and persistent AR experiences, object detection and image tracking.

  • We believe AR can enable profound experiences and Apple is uniquely positioned to provide

  • the best AR experience because of the seamless integration of our hardware and software.

  • The new capabilities of ARKit 2 will build on the potential of the thousands of AR apps

  • already available in the App Store that are changing the way iPhone and iPad users see

  • and experience the world.

  • Turning to Mac, we want to empower our developers to bring their innovative apps from the iOS

  • ecosystem to the Mac with minimal effort.

  • Though iOS and macOS are different, they've shared common foundations from the very beginning,

  • so we've taken key frameworks from iOS and adapted them to specific Mac behaviors like

  • using a mouse or track pad, resizing windows, copy and paste and drag and drop.

  • We've started with some of our own apps, so this fall, News, Stocks, Voice Memos and Home

  • will be available on the Mac for the first time with macOS Mojave and we'll be bringing

  • these great new tools to our developers next year.

  • We believe this will dramatically broaden the ecosystem to benefit all Mac users, creating

  • even more great reasons to choose Mac.

  • Also this fall, the Mac App Store is getting a full redesign with rich editorial content

  • to help customers discover great Mac apps from our developers.

  • We believe privacy is one of the most important issues of the 21st century and we're always

  • working to make our products more private and more secure for our users.

  • As we announced at WWDC, beginning this fall, Safari will prevent share buttons and comment

  • widgets on webpages from tracking users without their permission.

  • Safari already protects personal data as users browse the web so they won't be re-targeted

  • by ads.

  • For Apple Watch, users will see a significant expansion of features and functionality in

  • watchOS 5.

  • Apple Watch will become an even stronger companion for fitness, communication and quick access

  • to information with features including new workouts, activity sharing competitions, auto

  • workout detection, advanced running features, walkie-talkie, podcast and third party apps

  • on the Siri watch face.

  • For Apple TV, we've seen major growth in sales since the introduction of Apple TV 4K last

  • fall as video providers around the world choose Apple TV 4K to deliver their subscription

  • services.

  • Later this year, Charter Communications will begin offering Apple TV 4K to its customers

  • in nearly 50 million US households, providing access to live channels and tens of thousands

  • of on-demand programs via the Spectrum TV app on Apple TV 4K, iPhone and iPad.

  • And tvOS will take the cinematic experience of Apple TV 4K to the next level this fall

  • with support for Dolby Atmos audio and new features to easily find popular shows and

  • movies.

  • Apple TV 4K already offers customers the largest collection of 4K HDR movies and this fall,

  • iTunes will be the home to the largest collection of Dolby Atmos-supported movies anywhere.

  • I'm proud that our team's hard work has an impact even beyond these innovative industry-leading

  • products and services.

  • We're always working to leave the world better than we found it and as part of our commitment

  • to address climate change and increase the use of renewable energy in our supply chain,

  • we recently announced a first of its kind investment fund in China.

  • Initially, 10 suppliers will join us in investing nearly $300 million over the next four years

  • into the China Clean Energy Fund.

  • The fund will invest in and develop clean energy projects totaling more than 1 gigawatt

  • of renewable energy in China, the equivalent of powering nearly 1 million homes.

  • We're seeing great momentum in our Everyone Can Code and Everyone Can Create initiatives.

  • More than 5,000 schools and community colleges are now teaching Everyone Can Code and more

  • than 350 schools have committed to incorporating Everyone Can Create into their curricula for

  • the upcoming school year.

  • Coding skills are opening doors for students and job seekers around the world as tremendous

  • growth in the app economy creates opportunity everywhere we look.

  • We're also teaming up with leading educators for blind and deaf communities across the

  • United States who will start teaching Everyone Can Code this Fall.

  • Looking ahead, we couldn't be more excited about the products and services in our pipeline

  • as well as limitless applications for augmented reality and machine learning technology.

  • We're working with key partners in the enterprise to change the way work gets done with iOS

  • and Mac.

  • We're welcoming communities and offering learning opportunities at our retail locations through

  • hundreds of thousands of Today at Apple sessions each quarter.

  • We're expanding our reach into emerging markets and seeing strong double-digit growth in revenue

  • and we're making great progress toward our goal of significantly expanding our services

  • business.

  • And now, for more details on the record June quarter results, I'd like to turn the call

  • over to Luca.

  • We're very pleased to report the financial results of our best June quarter ever.

  • As we have done in every quarter this fiscal year, we set new quarterly records for both

  • revenue and earnings per share, with revenue up 17% year-over-year and EPS up 40%.

  • We generated $53.3 billion of revenue with year-over-year growth in all of our geographic

  • segments and new June quarter records in the Americas, Europe, Japan and rest of Asia Pacific.

  • We grew in each of our top 15 markets, with especially strong performance in the US, Hong

  • Kong, Russia, Mexico, the Middle East and Africa, all places where revenue was up by

  • more than 20%.

  • Gross margin was 38.3%, flat sequentially, as cost improvements and foreign exchange

  • offset the seasonal loss of leverage.

  • Net income was $11.5 billion, up $2.8 billion or 32% over last year and it was also a new

  • June quarter record.

  • Diluted earnings per share were $2.34, up 40% and also a new record for the June quarter

  • and cash flow from operations was very strong at $14.5 billion.

  • iPhone revenue grew 20% year-over-year with iPhone ASP increasing to $724 from $606 a

  • year ago, driven by the strong performance of iPhone X, iPhone 8, iPhone 8 Plus across

  • the world.

  • During the quarter, we sold 41.3 million iPhones, with double-digit unit growth in several markets

  • including the US, Canada, Germany, Switzerland, Mexico, Hong Kong, Russia, the Middle East

  • and Africa.

  • Our performance from a customer demand standpoint was stronger than our reported results as

  • we reduced iPhone channel inventory by 3.5 million units during the quarter.

  • We exited the June quarter towards the lower end of our target range of 5 to 7 weeks of

  • iPhone channel inventory.

  • Customer satisfaction with iPhone continues to be outstanding and is the highest in the

  • industry.

  • The latest survey of US consumers from 451 Research indicates that across all iPhone

  • models, customer satisfaction was 96% and combining iPhone 8, 8 Plus and iPhone X, it

  • was even higher at 98%.

  • And among business buyers who plan to purchase smartphones in the September quarter, 81%

  • plan to purchase iPhones, up 3 points from the last survey.

  • Turning to services, we had our best results ever with all-time record revenue of $9.5

  • billion.

  • Services revenue included a favorable $236 million one-time item in connection with the

  • final resolution of various lawsuits.

  • Excluding this amount, services revenue was still an all-time record and the underlying

  • growth rate of our services business was a terrific 28% over last year.

  • We generated double-digit services growth in all our geographic segments and the App

  • Store, AppleCare, Apple Music, cloud services and Apple Pay all set new June quarter records.

  • Our other product category also set a new record for the June quarter with revenue of

  • over $3.7 billion.

  • That's up 37% from last year with great sales momentum for both Apple Watch and AirPods.

  • Apple Watch continues to be the best selling smartwatch by a wide margin and units and

  • revenue grew dramatically during the quarter.

  • AirPods continue to be a runaway success and we've been selling them as fast as we can

  • make them since their launch a year and a half ago.

  • Next, I'd like to talk about the Mac.

  • We were very happy to see double digit year-over-year growth in our active installed base of Macs

  • to a new all-time high with nearly 60% of purchases during the quarter coming from customers

  • who are new to Mac.

  • Our year-over-year sales performance was impacted by the different timing of the MacBook Pro

  • launch which did not occur until early Q4 this year as opposed to June last year, with

  • the subsequent channel fill during the June quarter.

  • Even with a difficult launch comparison, we saw great momentum in many emerging markets,

  • with growth well into double digits and we established new June quarter records for Mac

  • sales in India, Turkey, Chile and Central and Eastern Europe.

  • iPad unit sales grew for the fifth consecutive quarter and we gained significant share of

  • the global tablet market based on the latest estimates from IDC.

  • We recorded double digit iPad unit growth in both our Greater China and rest of Asia

  • Pacific segments with a new June quarter record for iPad sales in Mainland China.

  • Almost half of iPad purchases in the quarter were by customers new to iPad and our active

  • installed base of iPads reached a new all-time high.

  • Our overall performance compared to last year was impacted by the introduction of new iPad

  • Pro models in June of last year which resulted in both a different mix with higher ASPs and

  • channel sale a year ago.

  • NPD indicates that iPad has 60% share of the US tablet market in the June quarter, up from

  • 51% share a year ago.

  • And the most recent consumer survey from 451 Research measured iPad customer satisfaction

  • ratings of 94%, and among business customers who plan to purchase tablets in the September

  • quarter, 75% plan to purchase iPads.

  • We continue to make great strides with enterprise customers across multiple industries.

  • For example, financial services institutions are increasingly using iPads to deploy digital

  • signature solutions for customer consent, compliance requirements, new account openings

  • and services transactions.

  • In the railway industry, businesses around the world are using iPhone and iPad to support

  • operations, training, passenger engagement and maintenance activities.

  • And leading global automotive companies are deploying iPads in dealerships for sales enablement

  • and end-to-end customer service management and are choosing iPhone as the standard mobile

  • device for their employees around the world.

  • More and more companies are giving their teams a choice when it comes to the devices they

  • use at work and enterprises including Salesforce and Capital One are deploying Macs based on

  • employee preference.

  • In fact, at Salesforce, the majority of their 35,000 employees are using Macs and companies

  • tell us that Mac has been instrumental in helping them attract and retain talent while

  • providing strong security, streamlined deployment, workflow and significantly lower total cost

  • of ownership.

  • We're also seeing great interest in Business Chat, our powerful new way for organizations

  • to connect with customers.

  • Business Chat lets customers get answers to questions, resolve issues and complete transactions

  • directly from within Messages by starting a conversation on their iPhone or iPad and

  • even continue the conversation on their Mac or Apple Watch.

  • DISH Network is making Business Chat available to customers across the US to enhance the

  • customer service experience for pay TV.

  • Customers can instantly reach a live agent with their questions, make account changes,

  • schedule an appointment, or order a pay-per-view movie or sporting event, all without leaving

  • the Messages conversation.

  • And Citizens Bank Park, home of the Philadelphia Phillies, is testing Business Chat with Aramark

  • to handle beverage holders during games.

  • Fans simply use their iPhone camera to scan a QR code on the back of their seats taking

  • them directly to a Business Chat conversation in Messages.

  • From there, they can order drinks, pay quickly and securely with Apple Pay and have them

  • delivered directly to their seats without missing a moment of on-field play.

  • Our retail and online stores had a great quarter thanks to very strong growth from iPhone,

  • AirPods and Apple Watch and the expansion of HomePod to Canada, France and Germany.

  • Our stores hosted more than 250,000 of our very successful Today at Apple sessions.

  • We continue to add content across all Today at Apple topics including popular new sessions

  • on music and photography.

  • We opened our 50th retail store in Greater China during the quarter and we just opened

  • a beautiful new store in Milan this month, bringing the number of stores located outside

  • the US to 46% of the total.

  • Let me now turn to our cash position.

  • We ended the quarter with $243.7 billion in cash plus marketable securities.

  • We retired $6 billion of debt during the quarter, leaving us with $102.6 billion in term debt

  • and $12 billion in commercial paper outstanding for a net cash position of $129.1 billion.

  • As we explained in February, we plan to reach a net cash neutral position over time.

  • We returned almost $25 billion to investors during the quarter, including $3.7 billion

  • in dividends and equivalents.

  • We repurchased $20 billion worth of Apple shares of which $10 billion related to the

  • completion of our previous $210 billion buyback program and $10 billion to the beginning of

  • the new $100 billion authorization we announced three months ago for a total of 112.8 million

  • shares repurchased through open market transactions during the quarter.

  • As we move ahead into the September quarter, I'd like to review our outlook which includes

  • the types of forward-looking information that Nancy referred to at the beginning of the

  • call.

  • We expect revenue to be between $60 billion and $62 billion.

  • As you will recall, our September quarter results last year included a one-time favorable

  • adjustment of $640 million to our services revenue.

  • Taking that adjustment into account, our revenue guidance implies year-over-year growth of

  • about 16% to 19%.

  • We expect gross margin to be between 38% and 38.5%.

  • We expect OpEx to be between $7.95 billion and $8.05 billion.

  • We expect OI&E to be about $300 million and we expect the tax rate to be about 15% before

  • discrete items.

  • Also today, our Board of Directors has declared a cash dividend of $0.73 per share of common

  • stock payable on August 16, 2018 to shareholders of record as of August 13, 2018.

  • With that, I'd like to open the call to questions.

  • And we ask that you limit yourself to one, one-part question and one follow up.

  • Operator, may we have the first question, please.

  • I'll ask both my questions up front.

  • First, for Tim.

  • You're on track to hit your services revenue target even earlier than planned, so how are

  • you thinking about the next legs of services growth as you move into the next three to

  • five years?

  • And then for you, Luca, NAND prices are falling this year.

  • Services mix is rising.

  • Those should both positively influence gross margins and yet we're seeing gross margin

  • sort of hang out here at 38%.

  • What are the offsetting headwinds and is it possible that we could see the tailwinds start

  • to overpower those headwinds in the next couple of quarters and see gross margins drift higher?

  • On the services side, we're thrilled with the results.

  • They were very broad based.

  • We had double digit services growth in all of the geographic segments and the App Store,

  • AppleCare, Apple Music, cloud services, Apple Pay all set new June quarter records and of

  • course subscriptions now past the 300 million, as I'd mentioned before, and so we couldn't

  • be happier with how things are going.

  • In terms of the next leg of this, given the momentum that we're seeing across the board,

  • we feel great about our current services, but obviously we're also thrilled about our

  • pipeline that have some new services in it as well.

  • And so with the combination of these, we feel great about hitting our objectives and maybe

  • even doing a little better.

  • Katy, for margins, let me tell you about the puts and takes for the June quarter, then

  • I'll talk about the guidance for Q4 and make some general observations for the future.

  • Starting with the June quarter, typically we see a decline in gross margin going from

  • the March quarter to the June quarter.

  • Last year, we were down 40 bps.

  • Two years ago we were down 140 bps.

  • This year, we were able to keep GM flat sequentially.

  • During the quarter, we always have some loss of leverage because of our typical seasonality.

  • This year we were able to offset that with some cost improvements and also we had some

  • favorability in foreign exchange on a sequential basis.

  • Unfortunately, as you know, the US dollar has already appreciated again recently, so

  • we do not expect to see that favorability to repeat during the September quarter.

  • So those are the puts and takes for June and we're very happy to see gross margin sequentially

  • flat for June.

  • For September, we're also guiding about flat sequentially at the midpoint.

  • As you know, we typically have what we call product transition costs during the September

  • quarter, and this year we also have about 30 bps of headwind from foreign exchange again

  • because the dollar has appreciated recently.

  • We expect those two factors to be offset by positive leverage, because you've seen the

  • revenue guidance that we provided and the mix to services that you've actually mentioned

  • during your question.

  • So we feel pretty good about also the guidance for the fourth quarter.

  • Looking forward, we don't provide guidance beyond the current quarter, but I think you

  • know we have a pretty good record over the last several years to make good business decisions,

  • balancing units, revenue and margins.

  • As you know, foreign exchange has been a very significant headwind over the last three-plus

  • years, but we've been able to manage that.

  • On the memory front, it is true that price has started to decline.

  • It has been a significant headwind for the last 12, 18 months and still in the June quarter

  • was a negative.

  • We believe that we're going to start seeing some improvement from here on.

  • Thank you for that color.

  • Can we have the next question please.

  • Next question please.

  • Tim, can you talk a bit about trends within your iPhone sales?

  • ASPs were above expectations and now that you've had -- and that's clearly better than

  • some of the comments from some of your competitors.

  • Now that you've had about nine months of experience with a high-end fully featured phone, can

  • you talk a bit about what you think customers want, what the elasticity of demand is and

  • how you're sort of thinking about your competitive position?

  • And then I have a follow-up.

  • Yeah, Shannon, we feel great about the results on iPhone, up 20%, and if you look for the

  • cycle, by the cycle, I mean Q1, Q2 and Q3, we've had on an average weekly basis, growth

  • in units of sort of mid single digit and ASP growth of double digit.

  • And so if you, and look at iPhone X in particular, it's the most innovative smartphone on the

  • market.

  • We priced it at a level that represented the value of it and we could not be happier that

  • it has been the top selling iPhone since the launch, and so we feel terrific about iPhone

  • X.

  • If you look at the sort of the top of our line together, and by that I mean the iPhone

  • X, the 8 and the 8 Plus, they are growing very nicely, as you can probably tell from

  • looking at the ASP and we couldn't be happier with how that's gone.

  • And so I think in this cycle, we've learned that customers want innovative products and

  • we sort of already knew that in other cycles and other points in times, but it just puts

  • an exclamation point by that I believe with looking at the results.

  • At the unit level, the iPhone SE had a difficult comp to the year-ago quarter and so, when

  • we changed some of the configurations, memory configurations in the year-ago quarter.

  • If you look at it on a geographic basis, the top three selling phones in urban China were

  • iPhone, where iPhone X was number one and has been for a couple of quarters, and iPhones

  • make up three of the top five smartphones in the US, UK and Japan.

  • And so it's difficult sometimes to get a read over exactly what's happening in the market,

  • but given the industry numbers that we've seen, it's clear that we picked up global

  • market share and picked up market share in several countries, not only iPhone, but iPad

  • as well.

  • And then can you talk a bit about China 19% -- Greater China, up 19% year-over-year during

  • the quarter, I believe, obviously, iPhone doing well, but there was some concern that

  • maybe some of what's going on in the trade world might have impacted, it doesn't seem

  • like that.

  • So I'm just curious as to what -- what you're seeing in China and how you're thinking about

  • it as you look forward?

  • This is the fourth consecutive quarter that we've had double digit growth in Greater China.

  • I mentioned how iPhone X and the iPhones are selling.

  • We did pick up share in iPhone and iPad, but if you look more holistically at our complete

  • line, we had double digit growth from services to iPad to iPhone and to our other product

  • category which the watch did extremely well, and so there are lots of good things happening

  • there.

  • In terms of the tariffs themselves, maybe I could sort of take a step back because I'm

  • sure some people have questions on this.

  • And our view on tariffs is that they show up as a tax on the consumer and wind up resulting

  • in lower economic growth and sometimes can bring about significant risk of unintended

  • consequences.

  • That said, the trade relationships and agreements that the US has between the US and other major

  • economies are very complex and it's clear that several are in need of modernizing, but

  • we think that in the vast majority of situations that tariffs are not the approach to doing

  • that and so we're sort of encouraging dialogue and so forth.

  • In terms of the tariffs that have been imposed or have exited the comment period -- I think

  • there's one that's exiting today -- there have been three of those and maybe I can walk

  • through those briefly just to make sure everybody is on the same page.

  • The first was the US imposed a tariff on steel and aluminum.

  • That was many, many different countries.

  • That started I believe at the beginning of June.

  • There have been two other tariffs that have totaled about $50 billion of goods from China

  • that have either been implemented or exiting the comment period in this month.

  • I think the latest one is today.

  • If you look at those three tariffs, none of our products were directly affected by the

  • tariffs.

  • There is a fourth tariff which includes goods valued at $200 billion, also focused on goods

  • that are imported from China.

  • That one is out for public comment.

  • Probably like everyone else, we're evaluating that one and we'll be sharing our views of

  • it with the administration and so forth before the comment period for that one ends.

  • It's actually a tedious process in going through it because you not only have to analyze the

  • revenue products, which are a bit more straightforward to analyze, but you also have to analyze the

  • purchases that you're making through other companies that are not related to revenue.

  • Maybe they're related to data centers and this sort of thing and so we're going through

  • that now and we'll be sharing our results later on those and feeding back public comment.

  • Of course the risk associated with more of a macroeconomic issue such as an economic

  • slowdown in one or more countries or currency fluctuations that are related to tariffs is

  • very difficult to quantify.

  • And so that, and we're not even trying to quantify that, to be clear about it.

  • All of this said, we're optimistic, as I've been the whole time, that this will get sorted

  • out because there is an inescapable mutuality between the US and China that sort of serves

  • as a magnet to bring both countries together, that each country can only prosper if the

  • other does and of course the world needs both US and China to prosper for the world to do

  • well.

  • That said, I can't predict the future, but I am optimistic that the countries will get

  • through this and we are hoping that calm heads prevail.

  • Can we have the next question please.

  • I'm wondering if you could talk a little bit about the multi-year partnership with Oprah

  • Winfrey and what that says about your original content strategy and also Apple Music, if

  • you can give us a little more color sort of an update, maybe around paid subscribers,

  • your total subscribers around Apple Music and how you feel that's rolled out?

  • We are very excited to work with Oprah.

  • We think that her incomparable ability and talent to connect with audiences around the

  • world, there is no match.

  • And we think that we can do some great in original content together, and so we could

  • not be happier in working with Oprah.

  • As you know, we hired two highly respected television executives last year and they have

  • been here now for several months and have been working on a project that we are not

  • really ready to share the -- all the details of it yet, but I couldn't be more excited

  • about what's going on there and we've got great talent in the area that we've sourced

  • from different places and feel really good about what we will eventually offer.

  • In terms of the sort of the key catalysts and the changes, the cord cutting in our view

  • is only going to accelerate and probably accelerate at a much faster rate than is widely thought.

  • We're seeing the things that we have on the periphery of this like Apple TV, units and

  • revenue grew by very strong double digits, very, very strong double digits in Q3.

  • As I mentioned in my opening comments, we're seeing different providers pick up the Apple

  • TV and use it as their box to go to market with their subscription service.

  • There are, within the 300 million-plus paid subscriptions, some of these are third party

  • video subscriptions and we see the growth that is going on there.

  • It's like 100% year-over-year.

  • And so all the things from a -- all the forcing functions here from the outside all point

  • to dramatic changes speeding up in the content industry, and so we're really happy to be

  • working on some of them, but we're just not ready to talk about it in depth today.

  • In terms of Apple Music, we're well over 50 million listeners now when you add our paid

  • subscribers and the folks in the trial, and so we're moving along at a very, very good

  • rate.

  • It appears to us or in what we've been told is that we took the leadership position in

  • North America during the quarter and we have the leadership position in Japan, and so in

  • some of the markets that we've been in for a long period of time.

  • We're doing quite well, but really, the key thing in music is not the competition between

  • companies that are providing music.

  • It's the real challenge is to grow the market, because if you add everyone up that's providing

  • subscription music today or streaming music, it's, outside of China, it's less than 200

  • million probably around the world.

  • And so it does seem to me there's an extraordinary opportunity in that business to grow the market

  • well and I think if we put our emphasis there, which we're doing, that will be a beneficiary

  • of that as other people will as well.

  • But I like where we are.

  • Our revenues on Apple Music grew over 50% as I'd mentioned earlier during the quarter,

  • and so some really, really strong results.

  • Thanks for the question.

  • I have one for Luca and one for Tim please.

  • Luca, I'm wondering as we think about modeling Q4, iPhone ASPs are typically up sequentially

  • about 2% to 4%, sort of low single digits.

  • Perhaps you can help us think through how we should be thinking about Q4.

  • I know you provided some commentary last quarter on how we should be thinking about Q3 ASPs.

  • Toni, as you know, we do not provide guidance for either units or ASPs for any product category,

  • but of course we provided guidance on revenue and that the guidance range implies growth

  • of 16% to 19%.

  • We expect the growth to come from strong growth from iPhone, from services and from wearables,

  • which has been a bit of our pattern during the course of the year.

  • On iPhone ASP, the only thing that I would point out is that obviously we're exiting

  • the June quarter at a significantly higher level than in the past and so that I think

  • is important to keep in mind as we move into the September quarter.

  • It's important to keep in mind the type of revenue growth that we've implied in our guidance.

  • Tim, I was wondering if you could just comment a little bit about the health of the smartphone

  • market.

  • Apple's smartphone iPhone units have been relatively flat for four years and I think

  • you've probably been a share gainer during the period which would suggest at least at

  • the high end of market, that is perhaps flat-to-down and I'm wondering if you can comment on, A,

  • whether you believe that and what you think might be happening with replacement cycles.

  • And specifically, also what impact if any you've seen from wider availability and less

  • expensive replacement batteries for iPhones.

  • I think the smartphone market is very healthy.

  • I think it's actually the best market in the world to be in for someone that is in the

  • business that we're in.

  • It's an enormous sized market and whether it grows, from our point of view, whether

  • it grows 1% or 2% or 5% or 6% or 10% or shrinks 1% or 2%, it's a great market because it's

  • just huge.

  • And so that's kind of the way that I view that.

  • iPhone revenues are up 20% for the quarter over last year.

  • We're really pleased with that and if you look at the sort of the cycle, which I'll

  • define as Q1, Q2, Q3 for ease, you'll see that we've grown like mid single digits and

  • on an average weekly sales point of view, and of course double digit on the ASP and

  • so I think it's really healthy.

  • In terms of replacement cycles, as I'd mentioned I think on a previous call, some replacement

  • cycles are lengthening.

  • I think that the major catalyst for that was probably the subsidy plans becoming a much

  • smaller percentage of total sales around the world than they were at one time and so I

  • think that some are lengthening.

  • And, but I think for us, the thing that we always have to do is come out with a really

  • great innovative product, and I think that iPhone X shows that when you deliver great

  • innovative product, there's enough people there that would like that and it can be a

  • really good business, and so that's how I look at that.

  • In terms of our installed base, which is something very important for us as it is one of the

  • key drivers of services, our active installed base on iPhone grew double digits over last

  • year during the quarter and so we're thrilled with that and you can see that carrying through

  • to the services line in the growth that we had there.

  • In terms of batteries, we have never done an analysis internally about how many people

  • decided to get a lower-priced battery than buy another phone because it was never about

  • that for us.

  • It was always about doing something great for the user and I think if you treat the

  • users and the customers well, then you have a good business over time and so that's how

  • we look at that.

  • Can we have the next question please.

  • So I'd like to focus on product roadmap and strategy.

  • There is a war going on for the home, the connected home, over the Internet of Things.

  • And with two products, the HomePod and Apple TV and the home, my question is strategically,

  • how do you feel about the importance of being in the home and whether it threatens your

  • dominance outside the home with your core business in the mobile devices if you sort

  • of lose that battle?

  • I'm just trying to figure out strategically when you think about where the puck is going,

  • how important is it for you to have a beachhead in the home as well as out of home?

  • I think the home business, Laura, is bigger than the HomePod and Apple TV.

  • They're both important products clearly, but everybody has their iPhone at home as well

  • and everybody has their Mac at home and everyone has their iPad at home.

  • And so in terms of the Siri access point, as you can tell from the 100 billion number

  • I quoted in the script, there's an extraordinary amount of usage of these products that are

  • used to perform home-related functions.

  • I do that every day with controlling all my home automation and so on and so forth.

  • Part of that is on HomePod but part of it is with the Apple Watch and the iPhone and

  • the iPad, and so I think home is important.

  • Home is important.

  • Work is important.

  • The movement between the two are important.

  • Health is important.

  • So the smartphone has become the repository that goes across the whole of your life, not

  • something that is just meant for a portion of it and so I think all of those are important

  • and we're focused on all of them.

  • I mean I'll watch your product roadmap and be able to tell what the answer is.

  • The other thing, the thing I get in fights with investors about the most is this and

  • I'd love your insight on this.

  • I love the expansion of the new products.

  • The question I have is are they actually on-ramps into the Apple ecosystem, the Beats, the Watch,

  • the AirPods, subscriptions, are they on-ramps into the ecosystem or is the on-ramp to the

  • ecosystem the iPhone and then these new products add revenue per member once you get somebody

  • into the ecosystem via the iPhone?

  • A lot of people that buy Apple products buy for the whole ecosystem, even though they

  • might not currently use all the different products.

  • And so the way that I think about those products are the products within the ecosystem itself.

  • And there's -- AirPods have really gone through the roof and the Apple Watch has hit an air

  • pocket and has gone to a whole different level as I'd mentioned earlier with our overall

  • wearables revenue.

  • And so in my view, this is a part of the -- they are a core part of the ecosystem.

  • But do they attract people to the ecosystem or does the person have to have an iPhone

  • first?

  • It is, well, but on your point though, it is clear from communications I've had with

  • users that some of them were attracted to iPhone because of the Apple Watch.

  • Oh I see.

  • And so the Apple Watch led them to the iPhone.

  • The reverse of that is also true, is that somebody got the iPhone and then decided I

  • really want something to coach me in fitness and to curate some of the communications and

  • so forth like the watch does so well and so it's not always a linear path.

  • I see these things as being somewhat fluid and different for each user.

  • So they're complementary and self-reinforcing?

  • A replay of today's call will be available for two weeks on Apple Podcast, as a webcast

  • on apple.com/investor and via telephone and the numbers for the telephone replay are 888-203-1112

  • or 719-457-0820.

  • Please enter confirmation code 5838188 and these replays will be available by approximately

  • 5 PM Pacific Time today.

  • Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142

  • and financial analysts can contact Matt Blake or me with additional questions.

  • Matt is at 408-974-7406 and I'm at 408-974-5420.

  • Thanks again for joining us.

  • That does conclude our conference for today.

  • Thank you for your participation.

Good day, and welcome to the Apple Incorporated Third Quarter Fiscal Year 2018 Earnings Conference

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蘋果2018年第三季度財報電話會議(AAPL) (Apple Earnings Call Q3 2018 (AAPL))

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    lawrence posted on 2021/01/14
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