Apple Inc.

Good afternoon and welcome to the Apple Q2 fiscal year 2024 earnings conference call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. 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 $90.8 billion and an EPS record of $1.53 for the March quarter. We set revenue records in more than a dozen countries and regions. These include, among others, March quarter records in Latin America and the Middle East, as well as Canada, India, Spain, and Turkey. We also achieved an all-time revenue record in Indonesia, one of the many markets where we continue to see so much potential. In services, we set an all-time revenue record up 14% over the past year. Keep in mind, as we described on the last call, in the March quarter a year ago, we were able to replenish iPhone channel inventory and fulfill significant pent-up demand from the December quarter COVID-related supply disruptions on the iPhone 14 Pro and 14 Pro Max. We estimate this one-time impact added close to $5 billion to the March quarter revenue last year. If we removed this from last year's results, our March quarter total company revenue this year would have grown. Despite this impact, we were still able to deliver the records I described. Of course, this past quarter, we were thrilled to launch Apple Vision Pro, and it has been so wonderful to hear from people who now get to experience the magic of spatial computing. They describe the impossible becoming possible right before their eyes, and they share their amazement and their emotions about what they can do now, whether it's reliving their most treasured memories or having a movie theater experience right in their living room. It's also great to see the enthusiasm from the enterprise market. For example, more than half of the Fortune 100 companies have already bought Apple Vision Pro units and are exploring innovative ways to use it to do things that weren't possible before. And this is just the beginning. Looking ahead, we're getting ready for an exciting product announcement next week that we think our customers will love. And next month, we have our Worldwide Developers Conference, which has generated enormous enthusiasm from our developers. We can't wait to reveal what we have in store. We continue to feel very bullish about our opportunity in generative AI. We are making significant investments, and we're looking forward to sharing some very exciting things with our customers soon. We believe in the transformative power and promise of AI, and we believe we have advantages that will differentiate us in this new era, including Apple's unique combination of seamless hardware, software, and services integration, groundbreaking Apple Silicon with our industry-leading neural engines and our unwavering focus on privacy, which underpins everything we create. As we push innovation forward, we continue to manage thoughtfully and deliberately through an uneven macroeconomic environment and remain focused on putting our users at the center of everything we do. Now let's turn to our results for the March quarter across each product category, beginning with iPhone. iPhone revenue for the March quarter was $46 billion, down 10% year over year. We faced a difficult compare over the previous year due to the $5 billion impact that I mentioned earlier. However, we still saw growth on iPhone in some markets, including mainland China, and according to Kantar, during the quarter, the two best-selling smartphones in urban China were the iPhone 15 and iPhone 15 Pro Max. I was in China recently where I had the chance to meet with developers and creators who are doing remarkable things with iPhone. And just a couple of weeks ago, I visited Vietnam, Indonesia, and Singapore, where it was incredible to see all the ways customers and communities are using our products and services to do amazing things. Everywhere I travel, people have such a great affinity for Apple, and it's one of the many reasons I'm so optimistic about the future. Turning to Mac, March quarter revenue was $7.5 billion, up 4% from a year ago. We had an amazing launch in early March with the new 13- and 15-inch MacBook Air. The world's most popular laptop is the best consumer laptop for AI with breakthrough performance of the M3 chip and its even more powerful neural engine. Whether it's an entrepreneur starting a new business or a college student finishing their degree, users depend on the power and portability of MacBook Air to take them places they couldn't have gone without it. In iPad, revenue for the March quarter was $5.6 billion, 17% lower year over year due to a difficult compare with the momentum following the launch of M2 iPad Pro and the 10th generation iPad last fiscal year. iPad continues to stand apart for its versatility, power, and performance. For video editors, music makers, and creatives of all kinds, iPad is empowering users to do more than they ever could with a tablet. Across wearables, home, and accessories, March quarter revenue was $7.9 billion, down 10% from a year ago due to a difficult launch compare on watch and AirPods. Apple Watch is helping runners go the extra mile on their wellness journeys, keeping hikers on course with the latest navigation capabilities in watchOS 10, and enabling users of all fitness levels to live a healthier day. Across our watch lineup, we're harnessing AI and machine learning to power lifesaving features like irregular rhythm notifications and fall detection. I often hear about how much these features mean to users and their loved ones, and I'm thankful that so many people are able to get help in their time of greatest need. As I shared earlier, we set an all-time revenue record in services with $23.9 billion up 14% year-over-year. We also achieved all-time revenue records across several categories in geographic segments. Audiences are tuning in on screens large, small, and spatial, and are enjoying Apple TV Plus originals like Palm Royale and Sugar. And we have some incredible theatrical releases coming this year, including Wolves, which reunites George Clooney and Brad Pitt. Apple TV Plus productions continue to be celebrated as major awards contenders. Since launch, Apple TV Plus productions have earned more than 2,100 award nominations and 480 wins. Meanwhile, we're enhancing the live sports experience with a new iPhone app, Apple Sports. This free app allows fans to follow their favorite teams and leagues with real-time scores, stats, and more. Apple Sports is the perfect companion for MLS season pass subscribers. Turning to retail, our stores continue to be vital spaces for connection and innovation. I was delighted to be in Shanghai for the opening of our latest flagship store. The energy and enthusiasm from our customers was truly something to behold. And across the United States, our incredible retail teams have been sharing Vision Pro demos with customers, delighting them with the profound and emotional experience of using it for the very first time. Everywhere we operate and everything we do, we're guided by our mission to enrich users' lives and leave the world better than we found it. whether we're making Apple Podcasts more accessible with a new transcripts feature or helping to safeguard iMessage users' privacy with new protections that can defend against advances in quantum computing. Our environmental work is another great example of how innovation and our values come together. As we work toward our goal of being carbon neutral across all of our products by 2030, we are proud of how we've been able to innovate and do more for our customers while taking less from the planet. Since 2015, Apple has cut our overall emissions by more than half, while revenue grew nearly 65% during that same time period. and we're now using more recycled materials in our products than ever before. Earlier this spring, we launched our first ever product to use 50% recycled materials with a new M3 powered MacBook Air. We're also investing in new solar and wind power in the US and Europe both to power our growing operations and our users' devices. And we're working with partners in India and the U.S. to replenish 100% of the water we use in places that need it most, with the goal of delivering billions of gallons of water benefits over the next two decades. Through our Restore Fund, Apple has committed $200 million to nature-based carbon removal projects. And last month, we welcomed two supplier partners as new investors who will together invest up to an additional $80 million in the fund. Whether we're enriching lives of users across the globe or doing our part to be a force for good in the world, we do everything with a deep sense of purpose at Apple. And I'm proud of the impact we've already made at the halfway point in a year of unprecedented innovation. I couldn't be more excited for the future we have ahead of us, driven by the imagination and innovation of our teams and the enduring importance of our products and services in people's lives. With that, I'll turn it over to Luca.

Thank you, Tim, and good afternoon, everyone. Revenue for the March quarter was $90.8 billion, down 4% from last year. Foreign exchange had a negative year over year impact of 140 basis points on our results. Products revenue was 66.9 billion, down 10% year over year, due to the challenging compare on iPhone that Tim described earlier, which was partially offset by strength from Mac. And thanks to our unparalleled customer satisfaction and loyalty and a high number of customers who are new to our products, our installed base of active devices reached an all-time high across all products and all geographic segments. Services revenue set an all-time record of $23.9 billion, up 14% year-over-year, with record performance in both developed and emerging markets. Company gross margin was 46.6%, up 70 basis points sequentially, driven by cost savings and favorable mix to services, partially offset by leverage. Products gross margin was 36.6%, down 280 basis points sequentially, primarily driven by seasonal loss of leverage and mix, partially offset by favorable costs. Services gross margin was 74.6%, up 180 basis points from last quarter due to a more favorable mix. Operating expenses of 14.4 billion were at the midpoint of the guidance range we provided and up 5% year over year. Net income was $23.6 billion. Diluted EPS was $1.53 and a March quarter record. And operating cash flow was strong at $22.7 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue was $46 billion, down 10% year-over-year. due to the almost $5 billion impact from a year ago that Tim described earlier. Adjusting for this one-time impact, iPhone revenue would be roughly flat to last year. Our iPhone active install base grew to a new all-time high in total and in every geographic segment. And during the March quarter, we saw many iPhone models as the top-selling smartphones around the world. In fact, According to a survey from Kantar, an iPhone was the top-selling model in the US, urban China, Australia, the UK, France, Germany, and Japan. And the iPhone 15 family continues to be very popular with customers. 451 Research recently measured customer satisfaction at 99% in the US. Mac revenue was $7.5 billion, up 4% year-over-year. driven by the strength of our new MacBook Air, powered by the M3 chip. Customers are loving the incredible AI performance of the latest MacBook Air and MacBook Pro models. And our Mac install base reached an all-time high, with half of our MacBook Air buyers during the quarter being new to Mac. Also, customer satisfaction for Mac was recently reported at 96% in the U.S., iPad generated 5.6 billion in revenue, down 17% year over year. iPad continued to face a challenging compare against the launch of the M2 iPad Pro and iPad 10 generation from last year. At the same time, the iPad install base has continued to grow and is at an all-time high, as over half of the customers who purchased iPads during the quarter were new to the product. In addition, the latest reports from 451 Research indicated customer satisfaction of 96% for iPad in the US. Wearables, home, and accessories revenue was 7.9 billion, down 10% year over year, due to a difficult launch compare. Last year, we had the continued benefit from the launches of the AirPods Pro second generation, the Watch SE, and the first Watch Ultra. Apple Watch continues to attract new customers, with almost two-thirds of customers purchasing an Apple Watch during the quarter being new to the product, sending the Apple Watch install base to a new all-time high. And customer satisfaction was recently measured at 95% in the U.S. In services, as I mentioned, total revenue reached an all-time record of 23.9 billion, growing 14% year-over-year, with our installed base of active devices continuing to grow at a nice pace. This provides a strong foundation for the future growth of the services business, as we continue to see increased customer engagement with our ecosystem. Both transacting accounts and paid accounts reached a new all-time high, with paid accounts growing double digits year over year. And paid subscriptions showed strong double-digit growth. We have well over 1 billion paid subscriptions across the services on our platform, more than double the number that we had only four years ago. We continue to improve the breadth and quality of our current services, from creating new games on Arcade and great new shows on TV+, to launching additional countries and partners for Apple Pay. Turning to enterprise, our customers continue to invest in Apple products to drive productivity and innovation. We see more and more enterprise customers embracing the Mac. In healthcare, Epic Systems, the world's largest electronic medical record provider, recently launched its native app for the Mac, making it easier for healthcare organizations like Emory Health to transition thousands of PCs to the Mac for clinical use. And since the launch of Vision Pro last quarter, many leading enterprise customers have been investing in this amazing new product to bring spatial computing apps and experiences to life. We are seeing so many compelling use cases, from aircraft engine maintenance training at KLM Airlines to real-time team collaboration for racing at Porsche to immersive kitchen design at Lowe's. we couldn't be more excited about the spatial computing opportunity in enterprise. Taking a quick step back, when we look at our performance during the first half of our fiscal year, total company revenue was roughly flat to the prior year, in spite of having one less week of sales during the period and some foreign exchange headwinds. We were particularly pleased with our strong momentum in emerging markets, as we set first half revenue records in several countries and regions, including Latin America, the Middle East, India, Indonesia, the Philippines, and Turkey. These results, coupled with double-digit growth in services and strong levels of gross margin, drove a first-half diluted EPS record of $3.71, up 9% from last year. Let me now turn to our cash position and capital return program. We ended the quarter with 162 billion in cash and marketable securities. We repaid 3.2 billion in maturing debt and commercial paper was unchanged sequentially, leaving us with total debt of 105 billion. As a result, net cash was 58 billion at the end of the quarter. During the quarter, we returned over $27 billion to shareholders, including $3.7 billion in dividends and equivalents and $23.5 billion through open market repurchases of 130 million Apple shares. Given the continued confidence we have in our business now and into the future, our board has authorized today an additional $110 billion for share repurchases as we maintain our goal of getting to net cash neutral over time. We're also raising our dividend by 4% to $0.25 per share of common stock, and we continue to plan for annual increases in the dividend going forward, as we've done for the last 12 years. This cash dividend will be payable on May 16, 2024 to shareholders of record as of May 13, 2024. As we move ahead into the June 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. We expect our June quarter total company revenue to grow low single digits year over year, in spite of a foreign exchange headwind of about 2.5 percentage points. We expect our services business to grow double digits at a rate similar to the growth we reported for the first half of the fiscal year. And we expect iPad revenue to grow double digits. We expect gross margin to be between 45.5% and 46.5%. We expect OPEX to be between $14.3 billion and $14.5 billion. We expect OINE to be around $50 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%. With that, let's open the call to questions.