Apple Inc.

Good day and welcome to the Apple Q4 fiscal year 2023 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 Suhasini Chandramouli, Director of Investor Relations. Please go ahead.

Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple CEO Tim Cook, and he'll be followed by CFO Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks.

Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, Apple is reporting revenue of $89.5 billion for the September quarter. We achieved an all-time revenue record in India, as well as September quarter records in several countries including Brazil, Canada, France, Indonesia, Mexico, the Philippines, Saudi Arabia, Turkey, the UAE, Vietnam, and more. iPhone revenue came in ahead of our expectations, setting a September quarter record, as well as quarterly records in many markets, including China mainland, Latin America, the Middle East, South Asia, and an all-time record in India. In services, we set an all-time revenue record with double-digit growth and ahead of our expectations. During the September quarter, we continue to face an uneven macroeconomic environment, including foreign exchange headwinds, and we've navigated these challenges by following the same principles that have always guided us. We've continued to invest in the future and manage for the long term. We've adapted continuously to circumstances beyond our control while being thoughtful and deliberate on spending. And we've carved a path of groundbreaking innovations and delivered with excellence every step of the way. That includes Apple Vision Pro, which has gotten such an amazing response from developers who are currently creating truly incredible apps. We're excited to get this magical product in the hands of customers early next year. Now let me share more about our products, beginning with iPhone. iPhone revenue came in at $43.8 billion, 3% higher than a year ago, and a new record for the September quarter. This fall, we were thrilled to debut the iPhone 15 lineup. The all-new iPhone 15 and iPhone 15 Plus feature a gorgeous design, powerful cameras, and the intuitive dynamic island. Powered by the industry-leading A17 Pro, our iPhone 15 Pro lineup has a beautiful, strong, and durable titanium design and the best iPhone camera system ever, including a 5X telephoto lens on iPhone 15 Pro Max. Customers are loving the entire iPhone 15 family, and reviews have been off the charts. In MAC, revenue came in at $7.6 billion, down 34% year-over-year from the prior year's record quarter. This was due to challenging market conditions as well as difficult compares against the supply disruptions and subsequent demand recapture we experienced a year ago. Earlier this week, we were excited to unveil the next generation of Apple Silicon with our incredible family of M3 chips, M3, M3 Pro, and M3 Max. We're continuing to innovate at a tremendous pace, and our industry-leading lineup of personal computers just got even better. The new MacBook Pro lineup brings our most advanced technology to our pro users, while iMac, the world's best-selling all-in-one, just got faster and more capable. And according to the latest data from Student Monitor, nearly two out of three college students chose a Mac. We couldn't be more excited about the future. Turning to iPad, revenue for the September quarter was $6.4 billion. iPad sets the gold standard for tablets, and our competitors are unable to match the iPad experience that is enabled by our seamless integration of hardware and software. iPad is also our most versatile product. In classrooms around the world, it's helping educators bring lessons to life while giving students a window into the world around them. And in artist workshops, design studios, and everywhere else creative minds come together, iPad supercharges the creative process, helping users take their ideas further than they ever could before. Across wearables, home, and accessories, revenue came in at $9.3 billion. Apple Watch has become essential in our lives, and this is our best Apple Watch lineup ever. With Apple Watch Series 9 and Apple Watch Ultra 2, we're giving people even more tools to stay safe and live healthy, active lives. With the new double tap gesture, users can easily control Apple Watch Series 9 and Apple Watch Ultra 2 using just one hand and without touching the display. It feels like magic. Our latest Apple Watch lineup also includes our first ever carbon neutral products, a significant achievement of innovation and determination. Apple's unique ecosystem of hardware, software, and services delivers an unparalleled user experience. During the quarter, we also had the chance to introduce a range of exciting new updates to our software that will allow users to get even more out of their devices. Whether it's personalized contact posters and new FaceTime features in iOS 17, new tools for users to make their experience their own in Mac OS Sonoma and iPad OS 17, or a bold new look in Watch OS X that lets you see and do more faster than ever, Apple is delivering an even better, richer experience that users are loving. Services revenue set an all-time record of $22.3 billion, a 16% year-over-year increase. We achieved all-time revenue records across App Store, Advertising, Apple Care, iCloud, Payment Services, and Video, as well as a September quarter revenue record in Apple Music. Whether subscribers are waking up to headlines on Apple News+, getting their morning workout in with Fitness Plus, feeling the beat with Apple Music on their way to work or school, or unwinding at the end of the day with Apple Arcade, we have so many different services to enrich their day. Apple TV Plus continues to delight customers as well. With new and returning shows like The Morning Show, Lessons in Chemistry, and Monarch, we're telling impactful stories that inspire imagination and stir the soul. Making movies that make a difference is also at the heart of Apple TV+, and we were thrilled to produce Martin Scorsese's Killers of the Flower Moon, a powerful work of cinema that premiered in theaters around the world last month. We're proud to say that since launch just over four years ago, Apple TV+, has earned nearly 1,600 award nominations and nearly 400 wins. We also offer subscribers an unprecedented live sports experience with MLS Season Pass. We couldn't be more pleased with how our partnership with Major League Soccer has gone in its first year. Subscriptions to MLS Season Pass have exceeded our expectations, and we're excited to continue that momentum next year. With the playoffs now underway, we can't wait to see who takes home the MLS Cup. And nowhere does the magic of Apple come alive more than it does in our stores. Over the past year, we've continued to find ways to connect with even more customers. We welcomed customers to our first ever retail locations in India. We also opened doors to new stores in Korea, China, and the UK, and expanded the Apple store online to Vietnam and Chile. And we have another store opening in China this week. In September, I joined our team at Apple Fifth Avenue on launch day, and the energy and excitement were unbelievable. Every time we connect with a customer, we're reminded why we do what we do. From simple joys of creating and sharing memories to life-saving features like emergency SOS via satellite, we're enriching lives in ways large and small. And whether we're working to safeguard user privacy, ensure technology made by Apple is accessible for everyone, or build an even more inclusive workplace, we're determined to lead with our values. Our environmental efforts are a great example of the intersection of our work and our values. Across Apple, we act on a simple premise. The best products in the world should be the best products for the world. We've made our environmental work a central focus of our innovation because we feel a responsibility to leave the world better than we found it, and because we know that climate change cannot be stopped unless everyone steps up and does their part. Our first ever carbon neutral products represent a major milestone, and we're going to go even further. We plan to make every product across our lineup carbon neutral by the end of the decade. And we're not doing it alone. Over 300 of our suppliers have committed to using 100% clean energy for Apple production by 2030. We also continue to invest in entrepreneurs who are lighting the way for a greener, more equitable future. Through our third impact accelerator class, we're proud to support a new class of diverse innovators on the cutting edge of green technology and clean energy. Apple is always looking forward, driven in equal measure by a sense of possibility and a deep belief in our purpose. We're motivated by the meaningful difference we can make for our customers and keenly determined to push the limits of technology even further. And that's why I'm so confident that Apple's future is bright. With that, I'll turn it over to Luca.

Thank you, Tim, and good afternoon, everyone. Revenue for the September quarter was $89.5 billion, down less than 1% from last year. Foreign exchange had a negative impact of over two percentage points, and on a constant currency basis, our revenue grew year over year in total and in each geographic segment. We set a September quarter record in the Americas and saw strong performance across our emerging markets, where both iPhone and services grew double digits. Products revenue was $67.2 billion, down 5% from last year, due to very challenging compares on both Mac and iPad, which I will discuss in more detail later on. At the same time, we reached a September quarter record on iPhone, driven by strength in emerging markets. Our total installed base of active devices reached an all-time high across all products and all geographic segments, thanks to our high levels of customer satisfaction and many new customers joining our ecosystem. Our services revenue set an all-time record of $22.3 billion, up 16 percent year-over-year, with growth accelerating sequentially from the June quarter. Our performance in services was broad-based, as we reached all-time revenue records in the Americas, Europe, and rest of Asia Pacific, and a September quarter record in Greater China. We also set new records in every services category. Company gross margin set a September quarter record at 45.2%, up 70 basis points sequentially, driven by leverage and favorable mix, partially offset by foreign exchange. Products gross margin was 36.6%, up 120 basis points sequentially, also driven by leverage and mix, partially offset by foreign exchange. Services gross margin was 70.9%, up 40 basis points from last quarter due to a different mix. Operating expenses of 13.5 billion were at the low end of the guidance range we provided, up 2% year over year. Net income was $23 billion. Diluted earnings per share was $1.46, up 13% versus last year, and a September quarter record. And operating cash flow was strong at $21.6 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue was $43.8 billion, up 3% year over year, and a new September quarter record. We had strong performance in several markets, including an all-time record in India and September quarter records in Canada, Latin America, the Middle East, and South Asia. Our iPhone active install base grew to a new all-time high, and fiscal 2023 was another record year for switches. We continue to see extremely high levels of customer satisfaction, which 451 Research recently measured at 98% in the U.S., Mac revenue was $7.6 billion, down 34% year-over-year, driven by challenging market conditions and compounded by a difficult compare in our own business, whereby last year we experienced supply disruptions from factory shutdowns in the June quarter and were subsequently able to fulfill significant pent-up demand during the September quarter. We also had a difference in launch timing, with the MacBook Air launching earlier this year in the June quarter compared to the September quarter last year. We have great confidence in our Mac lineup and are excited about the recently announced iMac and MacBook Pro powered by our M3 chips. Our install base is at an all-time high, and half of Mac buyers during the quarter were new to the product, driven by MacBook Air. Also, we saw reported customer satisfaction of 97% for Mac in the U.S. iPad generated $6.4 billion in revenue, down 10% year over year. Similar to Mac, these results were a function of a difficult compare from the supply disruptions in the June quarter a year ago and the subsequent fulfillment of pent-up demand in the September quarter. iPad continues to attract a large number of new customers to the install base, with over half of the customers who purchase iPads during the quarter being new to the product. And the latest reports from 451 Research indicate customer satisfaction of 98% in the U.S. Wearables, home, and accessories revenue was $9.3 billion, down 3% year over year. We had a September quarter record in Europe, and we saw strong performance in several emerging markets around the world. Apple Watch continues to expand its reach, with nearly two-thirds of customers purchasing an Apple Watch during the quarter being new to the product. And customer satisfaction for the watch was recently measured at 97% in the U.S., Services had a great quarter. We reached a new all-time revenue record of $22.3 billion, up 16% year-over-year. And we're happy to see growth coming from all categories and every geographic segment, which is a direct result of the strength of our ecosystem. Our installed base of over 2 billion active devices continues to grow at a nice pace and establishes a solid foundation for the future expansion of the ecosystem. And we continue to see increased customer engagement with our services. Both transacting accounts and paid accounts grew double digits year over year, each reaching a new all-time high. Also, our paid subscriptions showed strong growth. We have well over 1 billion paid subscriptions across the services on our platform, nearly double the number we had only three years ago. And finally, we continue to improve the breadth and quality of our current services, from exciting new content on Apple TV Plus and Apple Arcade to additional storage tiers on iCloud. We believe our customers will love these new offerings. Turning to enterprise, we are excited to see our business customers in both developed and emerging markets expand their deployment of Apple products and technologies to drive business innovation and employee satisfaction. Starbucks continues to invest in Apple technology to bring the best experience to their customers and employees, including tens of thousands of iPads across all retail stores to help their teams streamline order management, operations, and training. In addition, Starbucks recently refreshed over 10,000 Macs to the latest M2-powered MacBook Air for all store managers, enabling them to do their best work and improve productivity. And in Indonesia, popular technology company GoTo is offering Mac as a choice so that employees can have the best tools to be most productive. Today, more than half of its workforce are already choosing Mac for work. Let me now turn to our cash position and capital return program. We ended the quarter with over $162 billion in cash and marketable securities. We increased commercial paper by $2 billion, leaving us with total debt of $111 billion. As a result, net cash was $51 billion at the end of the quarter, and our goal of becoming net cash neutral over time remains unchanged. During the quarter, we returned nearly $25 billion to shareholders, including $3.8 billion in dividends and equivalents and $15.5 billion through open market repurchases of 85 million Apple shares. We also began a $5 billion accelerated share repurchase program in August, resulting in the initial delivery and retirement of 22 million shares. Taking a step back as we close our 2023 fiscal year, our annual revenue was $383 billion. While it was down 3% from the prior year, it grew on a constant currency basis despite a volatile and uneven macroeconomic environment. Our year-over-year revenue performance improved each quarter as we went through the year, and so did our earnings per share performance as we reported double-digit EPS growth in the September quarter. We are particularly pleased with our performance in emerging markets, with revenue reaching an all-time record in fiscal 2023 and double-digit growth in constant currency. We are expanding our direct presence in these markets, from new Apple retail stores in India to online stores in Vietnam and Chile. And we continue to work with our partners to offer a wide range of affordability programs so that we can best serve our customers. We're very excited about the momentum we have in these markets and the opportunity ahead of us. As we move ahead into the December quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suassini referred to at the beginning of the call. The color we are providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. Also, on foreign exchange, we expect a negative year-over-year revenue impact of about one percentage point. As a reminder, the December quarter this year will last the usual 13 weeks, whereas the December quarter a year ago spanned 14 weeks. For clarity, revenue from the extra week last year added approximately 7 percentage points to the quarter's total revenue. Despite having one less week this year, we expect our December quarter total company revenue to be similar to last year. We expect iPhone revenue to grow year over year on an absolute basis. We also expect to grow after normalizing for both last year's supply disruptions and the one extra week. We expect Mac year-over-year performance to significantly accelerate from the September quarter. We expect the year-over-year revenue performance for both iPad and wearables home and accessories to decelerate significantly from the September quarter due to a different timing of product launches. On iPad, we launched a new iPad Pro and iPad 10th generation, during the December quarter a year ago. For the wearables category, last year we had the full December quarter benefit from the launches of the AirPods Pro second generation, the Watch SE, and the first Watch Ultra. For our services business, we expect the average revenue per week to grow at a similar strong double digit rate as it did during the September quarter. We expect gross margin to be between 45% and 46%. We expect OPEX to be between $14.4 billion and $14.6 billion. We expect OINE to be around negative $200 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%. Finally, today our Board of Directors has declared a cash dividend of $0.24 per share of common stock, payable on November 16, 2023, to shareholders of record as of November 13, 2023. With that, let's open the call to questions.

Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please?

Certainly. We will go ahead and take our first question from Mike Ng of Goldman Sachs. Please go ahead.

Hey, good afternoon. Thank you very much for the question. I just have a question on iPhone storage and demand versus iCloud. As demand for storage grows, are you seeing a mid-shift towards higher storage iPhone models or Are consumers mostly opting for the same because of increased uptake of iCloud Plus? You know, what are some of the strategic and financial considerations here and tradeoffs as you think about the mixed shift towards higher storage models versus iCloud penetration? Thanks.

Michael, it's Tim. As you probably know, we started the line with the iPhone Pro Max at 256, and so we are seeing a different mix, if you will, this year than last year. Outside of that, not significant changes.

Great. Thank you. And as a separate follow-up, I was just wondering if you could talk a little bit about the market conditions on notebooks and desktops and any color that you can share regarding the timing of the M3 MacBook Pros this year versus the M2 earlier in the calendar year. Thank you.

Yeah, we're thrilled to have announced the M3 lineup and get the new MacBook Pro and the new iMac out there. We couldn't be more excited about it. As Lucas said, with the lineup that we've got and the compare issue that we don't have, During Q1, we anticipate a significant acceleration in the max space for Q1. To just repeat a little bit about the circumstances of the performance last quarter, in the year-ago June quarter, we had a factory disruption that lasted several weeks. The pent-up demand that resulted from that was filled in the September quarter, and that made the September quarter... not only a record but a substantial record and obviously we're now comparing against that for uh 23 and and so that i i wouldn't look at the negative 34 as representative of the underlying business performance is is sort of the nut of it excellent that's very clear thank you tim yeah all right thanks mike can we have the next question please

Our next question is from Aaron Rekers with Wells Fargo. Please go ahead.

Yeah, thanks for taking the question, and congratulations on the execution in the quarter. I'm curious, Tim, if you could, you know, help us characterize what the demand environment you're seeing in China looks like. You know, how has the reception been to the iPhone 15? And kind of similar question to the prior one, you know, how would you characterize the mix within China as you go through this current product cycle? And I have a follow-up.

If you look at how we did in Greater China for the quarter, we came in on a revenue basis minus two. But one thing to keep in mind here is that the FX impact was nearly six points. So we grew in constant currency. And underneath that, if you look at the different categories, iPhone actually set a September quarter record in mainland China. and what pulled down the performance was a combination largely of Mac and iPad. Services also grew during the quarter and the Mac and iPad suffered from the same issues that the company did with the compare issues to factory disruptions in Q3 that were filled subsequently in Q4 of 22. In addition to that, we had the top four selling phones in urban China for last year. I took a trip over there and could not be more excited about the interactions I had with customers and employees and others.

Yep. And then as a quick follow-up, I'm curious as we move towards more of an inflationary component pricing environment, Luca, how do we think about that effect or how you're thinking about the gross margin at the product level as maybe component pricing starts to turn what's been clearly very favorable over the last several quarters to more of an inflationary environment? Thank you.

Well, as you've seen from our results in Q4 and the guidance for Q1, we're obviously experiencing very strong levels of gross margin. The 45.2 was a record for the September quarter. And then, you know, the guidance for Q1 is obviously strong at 45% to 46%. Our gross margins are affected by multiple factors. Obviously, the commodity environment is one of them, as you mentioned. It's been a good environment in recent quarters. But equally important is the mix of what we sell, and obviously growth in services for us is favorable, and that has helped our company gross margin. Foreign exchange, on the other hand, has been a drag for several quarters given the strength of the dollar. You know, we don't provide guidance past the December quarter, which is a very important one for us because it's the beginning of the product cycle for many products. And so we feel very good, very confident about, you know, this coming year. And I think the gross margin guidance reflects that.

Thank you.

Thanks, Aaron. Can we have the next question, please?

Our next question is from Eric Woodring with Morgan Stanley. Please go ahead.

Awesome. Thank you very much for taking my questions. Maybe if I start, Luca, I know that the iPhone 15 Pro and Pro Max are constrained today, but I think some of your comments suggest you should be back to supply-demand balance before quarter end. So, I guess my question is, does your December quarter revenue guidance account for any supply constraints? And if so, is there any way to kind of quantify how much supply would be limiting your December quarter revenue performance? And then I have a follow-up. Thank you.

Yes, it's correct. We are constrained today on iPhone 15 Pro and iPhone 15 Pro Max. We're working very hard to get the product in the hands of all the customers that have ordered it. We expect, as of today, that we're going to be in supply-demand balance by the end of the quarter. So the guidance reflects that.

Okay, very clear. Thanks. And then maybe for you and Tim, you guys have been on the leading edge of innovation across hardware, software, silicon services, and I'm sure there's plenty of technologies and kind of longer-term projects that you're investing in. How should we think about your capital intensity as we look to fiscal year 24, just given over the last few years CapEx as a percentage of revenue had been relatively low compared to the eight years prior? So should we expect a step up or kind of similar capital intensity? And what are the more notable moving pieces, if any, that we should be thinking about? Thanks.

Well, the big areas of investment for us are tooling and equipment for manufacturing plants, our investments in data centers, and our investments in our own facilities, both corporate facilities and retail stores. And so both for the tooling in our plans and our data center investments, we tend to have a bit of a hybrid model where we share some of the investments with our partners and suppliers. And so maybe that's why you see sometimes a bit of variability. But over the last few years, we made all the investments that – that we need to make. And obviously, we're planning to make all the investments that we believe are needed and appropriate in order to continue to innovate.

Great. Thanks so much for the color, guys.

Thanks, Eric. Can we have the next question, please?

Our next question is from David Vogt with UBS. Please go ahead.

Great. Thanks, guys, for taking my question. I know you cover China. I want to pivot to the U.S. for a second. Obviously, iPhone and the business looks like it returned to growth in the quarter, but it's still relatively softer, kind of where I thought it would be at this point in the cycle. And some of the U.S. carriers obviously haven't been that particularly aggressive in promoting upgrades. So I just wanted to kind of get a sense, first, what you're seeing from your partners in the U.S. kind of currently and going forward, and what do you expect? And then second, Luca, on the margins, I mean, is it fair to say that the mix In Q1 from a product versus services, dynamic is kind of the key driver of the better gross margin guide as a whole relative to, let's say, the December quarter. Or is there anything else? I know you mentioned there's a lot of moving pieces, but is that the primary driver of the uplift in the margin? Thanks.

On the US carriers and the US business in general, it's really too early to call the iPhone cycle, particularly with the constraint around the Pro and the Pro Max, and the US tends to do quite well with those products. It's really too early to tell what the upgrade rates will be and what the switcher rates will be.

On the margin side, if I understood your question correctly about the December quarter guidance, keep in mind that actually December is the quarter where our products business tends to be very heavy because of the holiday season. And so the services gross margins that are accretive to total company have an impact but not as meaningful as other quarters during the year. And so I think that the main drivers of the guidance that we provided are the fact that we are seeing improved costs and improved mix on the product side of the business, partially offset by foreign exchange, which continues to be a drag, both sequentially and on a year-over-year basis.

Got it. So the weakness in iPad and wearables are less of an impact on sort of the margin trajectory in the December quarter? That's correct. I guess? That's correct. Got it. Thanks, Luca.

All right. Thanks, David. We'll take our next question, please.

Our next question is from Amit Daryanadi with Evercore.

Please go ahead. Good afternoon. Thanks for taking my question. I have two as well. I guess, first off, just the services growth rate. There was a tremendous acceleration, I think, in September quarter to 16% growth. It sounds like it's going to hold there pretty well into December. Can you just talk about what is driving this acceleration? Are there a couple of products that have just stepped up in a very meaningful way? Just maybe flush out what is driving this acceleration because it's fairly notable compared to what you've been seeing in the last few quarters.

We had a really strong quarter across the border, Amit, because both geographically and from a product category standpoint, we saw very significant growth. I mentioned the records on a geographic basis. And from a category standpoint... Uh, literally we set records in each one of the big categories. We had all time record for app store, for advertising, for cloud video, Apple care payments, and a September quarter record for music. So it's hard to pick, uh, You know, one in particular because they all did well. And really then we step back and we think about why is it that our services business is doing well. And it's because we have an installed base of customers that continues to grow at a very nice pace. And the engagement in our ecosystem continues to grow. We have more transacting accounts. We have more paid accounts. We have more subscriptions on the platform. And And we continue to add. We continue to add content and features. We're adding a lot of content on TV+, new games on Apple Arcade, new features, new storage plans for iCloud. So it's the combination of all these things and the fact that the engagement in the ecosystem is improving and therefore it benefits every service category.

Got it. That's really helpful. And then maybe if I could ask you about Vision Pro, which I believe is supposed to be launched more broadly sometime in 2024, in the early part of the year. I'm curious, how different do you think the launch and the consumer education of this product or a new category will be versus other things like AirPods or Apple Watch that you've done? And then perhaps any themes that stood out to you from the developers that have been able to use this in the developer labs, what feedback have you gotten from them?

Yeah, that's a great question. There's a tremendous amount of excitement around the Vision Pro, and we've been very happy to share it with developers. And we have developer labs set up in different parts of the world so that they can actually get their hands on it and are working on apps. I've been fortunate enough to see a number of those, and there's some real blow-away kinds of things that are coming out. And so that all looks good. To answer your question about is it similar to AirPods or Apple Watch, I would say no. There's never been a product like the Vision Pro. And so we're purposely bringing it out in our stores only so we can really put a great deal of attention on the last mile of it. We'll be offering demos in the stores, and it'll be a very different process than the normal grab-and-go kind of process.

Perfect, thank you.

Thanks, Amit. We'll take the next question, please.

Our next question is from Harsh Kumar with Piper Sandler.

Please go ahead. Yeah, hey, thanks for the question, and congratulations on tremendous execution and a very tough macro. Actually, Tim, the last question is a perfect segue here, given what you are doing with your Vision Pro. So lots of companies are experimenting with generative AI I'm curious about what kind of efforts you have. I'm sure there are segues into provision that you have, but I was curious about if you can give us a glimpse on how you might be able to monetize some of these efforts with generative AI.

If you kind of zoom out and look at what we've done on AI and machine learning and how we've used it, we view AI and machine learning as fundamental technologies. and they're integral to virtually every product that we ship. And so just recently when we shipped iOS 17, it had features like personal voice and live voicemail. AI is at the heart of these features. And then you can go all the way to then life-saving features on the watch and the phone like fall detection, crash detection, ECG on the watch. These would not be possible without AI. And so... We don't label them as such, if you will. We label them as to what their consumer benefit is, but the fundamental technology behind it is AI and machine learning. In terms of generative AI, We have, obviously, we have work going on. I'm not going to get into details about what it is because, as you know, we really don't do that. But you can bet that we're investing. We're investing quite a bit. We're going to do it responsibly. And you will see product advancements over time where those technologies are at the heart of them.

Thanks, Tim. Very clear. And for my follow-up, I had a philosophical question. So you guys always try to provide the best experience for consumers. Uh, to that end, I think over the last decade, you've in-sourced a lot of important chips in your phones and your, in your Macs, iPads, so on and so forth. And that was, I think a function that, that ARM wasn't around in the industry from a merchant angle, but now we see these, the silicon guys, uh, the chip guys moving to ARM architecture. So my question to you is, has the move to internal silicon been economically profitable proposition for Apple? Or is it a strategic one where you simply need to own this and it's vital to your products for the consumer experience? Or maybe there's a path back to chip vendors at some point in time.

It's really enabled us to build products that we could not build without doing it ourselves. And as you know, we like to own the primary technologies in the products that we ship. And arguably, the silicon is at the heart of the primary technologies. And so, no, I don't see going back. I am happier today than I was yesterday, than I was last week, that we've made the transition that we've made. And I see the benefit every day of it. Thanks, Tim. Yeah.

Thank you, Harsh. We'll take the next question, please.

Our next question is from Wamsi Mohan from Bank of America. Please go ahead.

Yes, thank you so much. Tim, over the last decade, pretty much, you've gained a lot of share in China. As you look here, some of the domestic players are starting to reemerge, especially in the high-end phone space. I know you touched on China, but how would you see Apple's positioning and opportunity for continued share gains, particularly in China and How was the linearity in China from a demand perspective? And I will follow up, please.

In the September quarter, we set an iPhone record, revenue record in China. We're very proud of that. And we obviously grew. The market predictions that I've seen would have the market contracting And so if those are correct, then we gained share last quarter. And so we're very proud of that. I don't know what every quarter will hold, and obviously we just give a bit of color on the current quarter. But over the long term, I view China as an incredibly important market, and I'm very optimistic about it.

Okay, thanks, Tim. And as a follow-up, you obviously have a great services quarter, and part of your services business has these licensing relationships with search partners where you serve a very important distribution function for them. Can you talk about how you think about these relationships and potentially some of the options maybe Apple has to mitigate some of the risk given some of the scrutiny with some of these search partners? Thank you so much.

They are important relationships and as you know, we don't get into our commercial relationships in the call. I see them as important and we make decisions that are in the best interest of our users or what we feel is in the best interest of our users. And that's kind of what we've done in the past and how we run the show in the future as well.

Okay. Thank you, Tim.

Thank you, Wamsi. Can we have the next question, please?

Our next question comes from Krish Sankar with TD Cohen. Please go ahead.

Hi. Hi. Thanks for taking the question. I had two of them, too. First one, Luke, thanks for the color on gross margin. And I look at it over the last four quarters. Even if on a year-over-year basis revenue declined, the gross margins have improved. And I understand services definitely helps. I'm just kind of curious, when you look at a go-forward basis, are most of the big step functions and cost reductions, like the max silicon conversion, et cetera, that are done, or is there more room for margin expansion from here? And then I had a follow-up.

Well, on the product side, as you know, when we launch new products, the cost structures of those products tend to be higher than the products that they replace. It happens because we're always adding new technologies, new features, and then we work through the cost curve over the life cycle of the product, and we tend to get benefits as time goes by. The guidance that we provided for December reflects all that, and so we're starting from a better position than a year ago or than, you know, in the past in general. There are other factors that play a role. For example, the mix of products that we sell. Not every product has the same gross margin profile. And so our guidance, our results are reflective of that. And also within a specific product category, a lot depends on the kind of models that we sell because they have different values. different margin profiles. I think one of the things that we've done well over the last few years is to offer more affordability solutions to our customers in the form of installment plans, trading options, and, and, you know, low cost financing in general. And what that has accomplished is reduced the affordability threshold for our customers. And therefore they can, you know, buy at the top of our product ranges. That has been a big factor in the reason for our margin expansion, uh, You know, we don't provide guidance or color past the current quarter because there's so many different variables that affect gross margins. But we obviously feel very good about the trajectory that we've had in 2023 and now the guidance that we provide for the beginning of our fiscal year. And we need some of these things because obviously the foreign exchange environment has been difficult and has been a bit of a drag for us. But net-net, we're very pleased where we are.

Got it. Thanks for that, Luca. And then a follow-up for Tim. Obviously, you're seeing amazing momentum in India. I'm just kind of curious, how do you look at, when you look at the India growth opportunity on these hardware units, How to think about ASP relative to that versus like the rest of the geographies? And is it a way to compare or contrast India, you know, growth momentum versus China maybe a decade ago or so at the same point of the rollout of, you know, the share gains in that geography?

Yeah, it's a great question. We had an all-time revenue record in India. We grew very strong, double digits. It's an incredibly exciting market for us and a major focus of ours. We have low share in a large market. And so it would seem that there's a lot of headroom there. The ASPs, I haven't looked at them most recently, but I'm sure that they're lower than the worldwide. But that doesn't bother us at all. In terms of the similarity, I would say each country has its own journey, and I wouldn't want to play the comparison game, but we see an extraordinary market, a lot of people moving into the middle class. Distribution is getting better. Lots of positives. We put two retail stores there, as you know. They're doing better than we anticipated. It's still early going, but they're off to a good start. And I couldn't be happier with how things are going at the moment. Thanks, Tim.

Thank you, Krish. We'll now take our next question, please.

Our next question is from Ben Wrightsies with Milius Research. Please go ahead.

Hey, thanks a lot. I appreciate the question. Tim, I appreciate all your commentary around China. It was great to kind of hear about the growth potential there, your optimism. I wanted to also ask about the supply chain and where is your priority? Do you have a priority to diversify your supply chain? How do you feel about Apple's supply chain around the world? And in particular, what do you think about further investments in the U.S. as well?

Our supply chain is truly global, and so we're investing all over the world, including in the United States. We were very focused on advanced manufacturing for the U.S., and have worked on a number of different projects in the U.S., whether it's Our venture with corning on the glass or the face ID module or semiconductors. And so all of these are advanced manufacturing, and I think exactly the kinds of things that the U.S. would be and are very, very good at. We also invest in other regions of the world, and we're continually optimizing the chain. And so the moment we learn something that didn't work exactly right, we're tweaking it. And so we're going to continue to do that. But at the end of the day, it will still be a global supply chain.

Got it. Thanks. Next one for Luca, just really quick on the extra week dynamic. There was also last year an issue with the iPhone production. where there was the COVID lockdowns in China. Is it possible to give some color around what that, I guess, having a normalized supply chain somewhat this year, what that benefit is this year, and maybe contrast that with the seven-point hit from the extra week? Thanks a lot.

Thanks for the question, Ben. I mentioned during the prepared remarks the extra week is seven points of revenue. We did have supply disruptions last year on the phone, on the 14 Pro and Pro Max in the December quarter a year ago. And when we normalize for those two factors, and I said it during the call, we still expect to grow on iPhone. So you take into account the loss of the extra week. You compare it with supply disruptions that are not going to repeat hopefully this year. And when you normalize for those two things, we still expect to grow on iPhone.

Thanks a lot, everybody. Appreciate it, Luca.

Thank you, Ben, and we'll take the last question now.

Our last question comes from Richard Kramer with Arate Research. Please go ahead.

Thank you very much. Tim, first off, if we look over the past two years, Apple sales are about $18 billion higher and R&B is up by about 8%, 8 billion, or over a third higher. Can you give us a sense of some of the main components or drivers behind that increase in innovation spend? Apple Silicon, is it new products like Vision Pro, or is it content to support new services? I think that's one of the top questions investors have. Thanks.

Sure. It's a number of things, Richard. It's some things I can't talk about. It's Vision Pro. It's AI and ML. It's the silicon investment that we're making, the transition with the Mac and other silicon. It's sort of all of those things. And But I think you would find that the R&D expenditure and the aggregate looks very competitive versus others.

And I would add, Richard, on this front, some of the investments that we're making in R&D are also one of the drivers for the gross margin expansion. So I think it's important to think about it that way. Okay.

That's great. And Luca, Tim mentioned college students choosing Macs, and you mentioned the record services revenue. What other metrics do you think you could provide to help investors understand how Apple measures and increases customer lifetime value, especially when we see a lot of users entering the ecosystem with relatively lower priced products or even refurbished devices? So you're growing your ecosystem, but how do you think about growing customer lifetime value over the long run?

Some of the metrics that I've mentioned before, obviously, we look at the installed base of active devices. We want to make sure that the customers that we acquire remain with us, and so we have good visibility over that, and we pay a lot of attention to the behavior of the installed base. both by product and by geography. And then we look at the daily engagement in the ecosystem. So that's why we pay a lot of attention on things like transacting accounts, paid accounts. We want to see if, in fact, we are able to move our customers from a free model to a paid model. uh, model over time. That's obviously, uh, very, very important for us. Uh, so there's, you know, all these, you know, we, we keep track of all these things and, and, uh, um, You know, that's, you know, and then what we do, because I think it's really important, is that over time we add new services and that, you know, obviously, like, for example, the progress that we made in payments in recent years, very, very important because we've attracted more and more people that are actually now using additional features on our devices, and we are able to monetize that. So we take all that into account. We understand what happens when a customer joins us, when they buy a primary device versus a used device. We understand their behavior well. you know in different markets and so on so we have i think pretty good visibility and and i think the progress that we're making in services we did 85 billion dollars in the last 12 months it's that's uh the size of a fortune 50 uh and uh you know it's significantly bigger than it was just a couple of years ago absolutely thanks very much thank you richard

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