Search

Apple Inc. (AAPL) CEO Tim Cook on Q2 2020 Results - Earnings Call Transcript - India Gone Viral

Apple Inc. (NASDAQ:AAPL) Q2 2020 Results Conference Call April 30, 2020 5:00 PM ET

Company Participants

Tejas Gala – Senior Manager, Corporate Finance and IR

Tim Cook – CEO

Luca Maestri – CFO

Conference Call Participants

Shannon Cross – Cross Research

Wamsi Mohan – Bank of America

Katy Huberty – Morgan Stanley

Amit Daryanani – Evercore

Jeriel Ong – Deutsche Bank

Samik Chatterjee – JP Morgan

Chris Caso – Raymond James

Operator

Good day everyone. Welcome to the Apple Incorporated Second Quarter Fiscal Year 2020 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 Mr. Tejas Gala, Senior Manager, Corporate Finance and Investor Relations. Please go ahead.

Tejas Gala

Thank you. Good afternoon and thank you for joining us.

Speaking first today is Apple’s CEO, Tim Cook, and he will 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 COVID-19 on the Company’s business and results of operations.

Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s most recently filed periodic reports on Form 10-K and Form 10-Q 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 or information, which speaks as of their respective dates.

I’d now like to turn the call over to Tim for introductory remarks.

Tim Cook

Thanks, Tejas. Good afternoon, everyone. Thanks for joining us today. I hope you’re staying safe and well.

Today Apple reports $58.3 billion in revenue, an all-time record for Services, and a quarterly record for Wearables, Home and Accessories. It was also a quarterly revenue record for Apple Retail powered by phenomenal growth in our online store. Amid the most challenging global environment in which we’ve ever operated our business, we’re proud to say that Apple grew during the quarter.

But before we dive more deeply into the numbers, I want to speak just for a bit on COVID-19. This is something Apple has been contending with since January. And I think that how we have responded, what we have been inspired to do, tells an important story about Apple’s great durability as a business, and the enduring importance of our products in our customers’ lives. It also speaks to Apple’s unmatched capacity to be creative, to think always in terms of the long term and to forge ahead when others may feel an instinct to pull back.

Before COVID-19 was on the horizon, we anticipated that Q2 was going to be a prolific and energetic period for Apple. And when the pandemic did strike, our teams not only succeeded in growing the business in introducing powerful new products, and in meeting our customers’ needs, but they also rose to the occasion in terms of meeting our broader obligations to the communities in which we live and work.

Let’s look quickly across the business. At the same time that they were leaving no stone unturned to get our latest generation of devices manufactured and into our customers’ hands, our worldwide network of supply chain partners, logistics and operations folks in every part of the Company were also sourcing more than 30 million masks for frontline medical workers, ensuring they’re donated to places of greatest need in every region around the world.

While our product teams were preparing to launch a new iPad Pro, Magic Keyboard, MacBook Air and the new iPhone SE, all of which have been very well received by reviewers and consumers alike, they were also working with our suppliers to design, test, manufacture and distribute more than 7.5 million face shields, and we continue to ship more than 1 million of these every week to the doctors, nurses and medical personnel on the frontlines.

In a quarter where our Services teams achieved strong growth, which Luca will dig into in a minute, and which speaks to the real durability of our Services strategy, these teams were also putting COVID-19 front and center. As Apple News, reached 125 million monthly active users, we elevated trusted information from reliable sources through a special COVID-19 vertical.

We let customers skip payments without incurring interest on Apple Card for March and April in light of financial hardship for many families. We worked with everyone from Oprah to Lady Gaga to inform, entertain and give back through Apple TV and services like FaceTime and Messages set new all-time records for daily volume during this quarter as users relied on their devices to stay connected in a new reality.

In software, at the same time that our teams worked with great creativity and excitement as we prepare to deliver our first ever all online Worldwide Developers Conference later this quarter, they also worked with the same creativity and speed to put together our COVID-19 symptom checking website and app in partnership with the CDC. As of today, the app has been installed nearly 2 million times and the web tool has received over 3 million unique visits. And just this month, to accelerate contact tracing, we are launching a joint effort with Google to enable the use of Bluetooth technology to help governments and health agencies reduce the spread of the virus with user privacy and security central to the design.

We paired these programmatic efforts with a broader strategy to get back where it’s needed most. We’ve made major corporate donations to response efforts around the world to support global citizens as well as a new fund for Americans experiencing food insecurity as a result of the crisis. When you tally these things up and consider our ongoing 2 to 1 match for employee donations, Apple’s contributions to the global response are significant, diverse, and a great source of pride for the whole chain.

We’re also doing what we can to help our employees, their families, and by extension their communities stay safe and well by modifying our operations where appropriate. This extends of course to our retail employees, they are Apple’s face to our customers and an instrumental part of our business and we’re compensating them normally despite store closures.

During a quarter where circumstances evolve by the hour, we have been gratified by the resilience and adaptability of our global supply chain. While we felt some temporary supply constraints in February, our operations team, suppliers and manufacturing partners have been safely returning to work and production was back at typical levels toward the end of March.

At this time of social distance, of shuttered school and gathering places, of delayed plans and new ways of socializing, we have seen significant evidence that our products have taken a renewed importance for customers. Teachers and students around the world are relying on our technology to teach, learn, and stay connected with each other. We are in the process of deploying major orders of iPads to school systems working to keep learning going strong at a distance, including tens of thousands in Ontario, Canada; Glasgow, Scotland and Puerto Rico, a 100,000 to the city of Los Angeles and 350,000 to New York City, our largest educational iPad deployment ever.

Since early March, we’ve seen unprecedented demand for a pro app from students, enthusiasts and creative professionals. These folks are keeping us all entertained and inspired as we stay at home. And to help them do it, we made Final Cut Pro X and Logic Pro X available for free for 90-days for everyone. And the reaction has been overwhelming, driving software downloads and usage to record levels.

And doctors and medical professionals are making even greater use of Apple Watch and other health features to communicate with patients and to treat them safely from a distance when necessary. With new FDA guidance on non-invasive remote patient monitoring, for example, the ECG app on Apple Watch is increasingly being used to facilitate remote ECG measurements and recordings for telemedicine usage, reducing patient and healthcare provider contact and exposure. Many hospitals such as Geisinger Health System, NYU Langone Health, and Stanford Health Care are using apps on iPad and iPhone to support communication and video conferences between hospitalized patients and their care teams. This enables the care teams to keep a close watch on patients without entering isolation rooms, which helps to minimize exposure and reduces some of the need for personal protective equipment.

Now, when you step back and tally all this up, when you consider all the ways COVID-19 has touched Apple, our customers and the way we work, this may not have been the quarter it could have been absent this pandemic, but I don’t think I can recall a quarter where I’ve been prouder of what we do or how we do it.

As I said at the outset, we achieved revenue of $58.3 billion and underneath that was product revenue of $45 billion. The performance of our product business had three very different phases during the March quarter. Based on Apple’s performance during the first five weeks of the quarter, we were confident we were headed toward a record second quarter at the very high end of our expectations. In the next five weeks of the quarter, as COVID-19 started impacting China, iPhone supply was temporarily affected, as well as demand for our products within China. This caused us to withdraw our revenue guidance in February. At that point, demand for our products outside of China was still strong and in line with our expectations. During the last three weeks of the quarter, as the virus spread globally and social distancing measures were put in place worldwide, including the closure of all our retail stores outside of Greater China on March 13th, and many channel partner points of sales around the world, we saw downward pressure on demand, particularly for iPhone and Wearables.

Given the lack of visibility and uncertainly in the near term, we will not be issuing guidance for the coming quarter. Over the long term though, we have a high degree of confidence in the enduring strength of our business. Our global supply chain is profoundly durable and resilient. We have shown the consistent ability to meet and manage temporary supply challenges like those caused by COVID-19. We have continued to deliver innovative new products across multiple categories that appeal to a broad cross-section of customers, including the all-new iPhone SE, which achieved unmatched technological capacity at an incredible value.

Our teams worldwide have tackled the complexities of this moment with unmatched creativity, good humor and dedication to our customers. For a company whose business is innovation, there are real upsides in periodically having to figure out how to do just about everything in a brand new way.

Our long-running investment in our Services strategy is succeeding. This business is growing and is a reflection of our enduring large and growing installed base. We expect to meet our longstanding goal of doubling our fiscal 2016 Services revenue in 2020. We have always run Apple for the long term. We entered this period with unmatched financial strain, a robust cash position and our best product pipeline ever.

Major investments, including our five-year commitment to contribute $350 billion to the economy here in the United States are moving forward full speed ahead. It’s in these moments that we set ourselves apart. We’ve always managed through difficult moments by doubling down and investing in the next generation of innovation. And that’s our strategy today.

And so, while we can’t say for sure how many chapters are in this book, we can have confidence that the ending will be a good one. Apple will continue to do everything we can do to help the global response and to keep our customers learning, creating, sharing, and connecting so that life can remain as normal as it can during this challenging time.

With that, I’ll hand things off to Luca.

Luca Maestri

Thank you, Tim. Good afternoon, everyone.

It has been a very different quarter than we were expecting when we last talked to you at the end of January. But, we could not be more proud of our Apple teams around the world, our role in supporting local communities and our partners throughout the value chain, and how resilient our business and financial performance has been during these challenging times.

So, the revenue for the quarter was $58.3 billion, up 1% from a year ago, despite the extreme circumstances from the impact of COVID-19 and a headwind of a 100 basis points from foreign exchange. Products revenue was $45 billion, down 3%.

After a very strong January, our performance was impacted particularly during the last three weeks of the quarter when lockdowns and point-of-sale closures increase due to COVID-19 spreading around the world and affected our product sales. However, on a demand basis, our performance was stronger than our reported results as we reduced iPhone channel inventory more than we did a year ago. Importantly, our installed base of active devices reached an all-time high in all of our geographic segments and all major product categories.

Services revenue followed a different trend with very strong year-over-year growth of 17%. We set a new all-time revenue record of $13.3 billion with all-time records in many of our Services categories and in most countries we track. I’ll provide more details on this later.

Company gross margin was 38.4%, flat sequentially with cost savings and mix shift towards Services offset by the seasonal loss of leverage. Products gross margin was 30.3%, decreasing 380 basis points sequentially due to loss of leverage and unfavorable mix. This drop was more pronounced than under normal circumstances due to the COVID-19 impact I mentioned earlier.

Services gross margin was 65.4%, up 100 basis points sequentially, driven by favorable mix. Our reported tax rate for the quarter was 14.4%. This was lower than our 16.5% guidance due to onetime discreet items.

Net income was $11.2 billion and earnings per share with $2.55, up 4%. Operating cash flow was very strong at $13.3 billion, an improvement of $2.2 billion over a year ago.

Let me get into more detail for each of our revenue categories.

iPhone revenue of $29 billion, declined 7% year-over-year as both iPhone supply and demand were affected by the impact of COVID-19 at some point during the quarter.

On the supply side, we suffered from some temporary supply shortages during February, but we’ve been extremely pleased with the resilience and adaptability of our global supply chain, as well as its ability to get people back to work safely when circumstances allow. Our operations team and manufacturing partners put forth an extraordinary effort to restore production quickly, and we exited the quarter in a good supply position for most of our product lines.

On the demand side, after very strong first five weeks, we saw the impact of COVID-19 affect demand in China for the next five weeks, and then more broadly around the world for the last three weeks of the quarter, when lockdowns and point-of-sale closures became more widespread in many countries.

While we did see a slight elongation in our replacement cycle towards the end of the quarter, which we attribute to the widespread point-of-sale closures, our active installed base of iPhones has reached an all-time high. This speaks to the quality of our products and strength of our ecosystem. In fact, in the U.S., the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 99% for iPhone 11, 11 Pro and 11 Pro Max combined.

Turning to Services. We set an all-time revenue record of $13.3 billion with strong performance across the board with all-time revenue records in the App Store, Apple Music, Video, cloud services, and our App Store search ad business. And we also set a March quarter record for AppleCare. Our new services, Apple TV Plus, Apple Arcade, Apple News Plus and Apple Card continue to add users, content and features while contributing to overall Services growth.

As Tim mentioned, we’re well on our way to accomplishing our goal of doubling our fiscal ‘16 Services revenue during 2020.

App Store revenue grew by strong double digits, thanks to robust customer demand for both in-app purchases and subscriptions. Our third-party subscription business grew across multiple categories and increased over 30% year-over-year, reaching a new all-time high. Our first party subscription services also continued to perform very well. Apple Music and cloud services, both set all-time revenue record and AppleCare set a March quarter record. Paid subscriptions for all three of these services were up strong double-digits.

Customer engagement in our ecosystem continues to grow strongly, and the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the March quarter. In particular, the number of paid accounts increased double digits in all of our geographic segments. We now have over 515 million paid subscriptions across the services on our platform, up 125 million from a year ago. On a sequential basis, paid subscriptions grew by over 35 million. This is the highest sequential growth we have ever experienced. With this momentum, we’re confident we will reach our increased target of 600 million paid subscriptions before the end of calendar 2020.

Wearables, Home and Accessories established a new March quarter record with revenue of $6.3 billion, up 23% year-over-year with strong double digit performance across all five geographic segments.

Our Wearables business is now the size of a Fortune 140 company, and we’re very excited by the many opportunities in front of us for this product category. For example, Apple Watch continues to expand its reach as over 75% of the customers purchasing Apple Watch around the world during the quarter were new to the product.

Next, I’d like to talk about Mac and iPad. Mac revenue was $5.4 billion; iPad revenue was $4.4 billion. Towards the end of the quarter, we launched a brand new iPad Pro that includes a first in class LiDAR scanner with some really exciting augmented reality applications; and MacBook Air with significantly improved performance at a lower price. We’re very pleased with the strong customer interest for both products.

Importantly, around half of the customers purchasing Macs and iPads around the world during the quarter were new to that product and the active installed base for both Mac and iPad reached a new all-time high. And the most recent surveys of consumers from 451 Research measured customer satisfaction at 95% for iPad and 96% for Mac.

In the enterprise market businesses everywhere have been making the transition to working remotely. We’ve created content to assist our customers in this transition including an on-demand video learning series focused on topics like remote deployments of iPad and Mac and security. We’ve also realigned our own retail business and enterprise teams to provide timely and relevant support to customers as they navigate new work environments. Some of our largest customers offering Mac to employees such as IBM and SAP have been able to pivot quickly to allow employees to easily set up and secure their devices from home, benefiting from Apple Business Manager and zero-touch deployment.

And we’ve seen countless examples of new projects of remote deployments implemented in just a few hours. Peloton for instance, worked with our New York teams to deploy an entire fleet of Macs overnight, so their team could work remotely.

In essential sectors, such as grocery and financial services, we’ve seen organizations adopt our technology to better serve their customers safely. Leading grocers around the world, like Trader Joe’s, Woolworths, Lawson’s, Sainsbury’s, Lidl, and Carrefour offer Apple Pay so customers can use contactless payments. And as stores shift to become fulfillment centers for online orders, organizations are leveraging apps for remote shoppers and food delivery to reduce foot traffic.

In banking, where safety and securities are a top priority, one way to protect company and client information is by providing corporate iOS devices to employees who use mobile phones daily as part of their jobs. As an example, Bank of America is purchasing tens of thousands of additional iOS devices for their workforce.

Let me now turn to our cash position.

First, I want to note that liquidity has not been an issue for us during these highly unusual financial market conditions. We have an extraordinarily strong balance sheet, very deep access to capital markets, and unmatched free cash flow generation. We ended the quarter with $193 billion in cash plus marketable securities, total debt of $110 billion. And as a result, net cash was $83 billion at the end of the quarter. We returned $22 billion to shareholders during the March quarter, including $18.5 billion through open market repurchases of 64.7 million Apple shares, and $3.4 billion in dividends and equivalents.

Finally, as we move ahead into the June quarter, I’d like to provide some color on what we are seeing, which includes the types of forward-looking information that Tejas referred to at the beginning of the call.

As Tim mentioned, given the lack of visibility and certainty in the near term, we will not be issuing guidance for the coming quarter. However, based on what we have seen in April, and how we think things might play out, I would like to provide some additional insight on headwinds and tailwinds we’re facing.

From a foreign exchange standpoint, the U.S. dollar has appreciated recently against most currencies around the world. And as a result, we expect our revenue to be negatively impacted by more than $1.5 billion on a year-over-year basis. Our global supply chain is back, up and running. We are in a typical supply position, including our usual ramp associated with new products recently launched. These newly launched products, iPad Pro, MacBook Air, and iPhone SE have all received outstanding customer response, even during these extreme circumstances.

On iPhone and Wearables, we expect a year-over-year revenue performance to worsen in the June quarter relative to the March quarter; on iPad and Mac, we expect the year-over-year revenue performance to improve in the June quarter.

On Services, we are seeing two distinct trends. First, customers are actively engaging with our ecosystem and digital services, and we believe the very strong recent performance in the App Store, Video, Music, and cloud services will continue throughout the June quarter. Second, due to the overall reduced level of economic activity, due to the lockdowns around the world, services like AppleCare and advertising are being impacted. AppleCare is comprised of our product repair business and the warranty agreements with our customers, both of which have been obviously affected by store closures and reduced level of customer traffic. Advertising, which is comprised of third-party agreements, our App Store search ads, and Apple News ads has been impacted by overall economic weakness and uncertainty on when businesses will reopen.

For gross margin, sequential headwinds include foreign exchange, the mix within products, and the seasonal loss of leverage on our product business. Foreign exchange will have a 70 basis points impact sequentially and 130 basis points impact year-over-year. Regarding product mix, keep in mind the commentary we provided at the revenue level. Sequential tailwinds include cost savings and the mix shift towards services.

With regard to capital allocation, our approach remains unchanged. We continue to invest confidently in our future while also returning value to our shareholders. We are in the midst of developing our most exciting pipeline of products and services ever while contributing over $350 billion to the U.S. economy and expanding our footprint in many cities around the country over a five-year period.

We also continue to believe that there is great value in our stock, and we are maintaining our target of reaching a net cash neutral position over time. As a testament to the confidence we have in our business today and into the future, our Board has authorized $50 billion for share repurchases in addition to the over $40 billion authorization remaining under the current share repurchase plan. Our Board has also authorized a 6% increase in our quarterly dividend and today declared a cash dividend of $0.82 per share of common stock, payable on May 14, 2020, to shareholders of record as of May 11, 2020.

Finally, and most importantly, we are managing Apple for the long term, as we’ve always done. During uncertain times historically, we have continued to invest in the business and this remains our philosophy. We will continue to stay focused on what we do best, investing in our product and service pipeline, managing the business wisely, and taking care of our teams and believe we will come out from this stronger.

With that, let’s open the call to questions.

Tejas Gala

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

Question-and-Answer Session

Operator

Yes. That will come from Shannon Cross, Cross Research.

Shannon Cross

Thank you very much for taking my question, and I hope everyone is well. Tim, you talked about seeing some improvement in the second half of April. So, I was wondering if you could just talk maybe a bit more on the segment, a geographic basis, what you’re seeing and in the various regions that you’re selling in and what you’re hearing from your customers. And then, I have a follow-up. Thank you.

Tim Cook

Sure, Shannon. If you look at — I’ll start with China. If you look at what happened in China, we were having a really good January. The lockdown started there toward the end of January, as you know. February, we saw a steep decline in demand. We closed our stores in February. As the lockdown completed in mid-February, toward the second half of February, we begin to open stores. We opened on a staggered basis that took about 30 days until mid-March. And from a demand point of view, we saw then an improvement in March over February. And if you look at, kind of where we are today, we’ve seen further improvement in April as compared to March. And so, that’s China.

If you look at the rest of the world, we were doing great in January, the first five weeks of the quarter. And we do believe that we were headed toward the sort of the top end of our expectations that we had talked to you about on the last call. The next five weeks were spent sort of reacting and getting the supply chain back up in full force and working through the sharp decline in China that I already talked about. The real thing for the rest of the world happened in March when the shelter-in-place orders went in and the work-from-home began. For those two, three weeks period, at the end of the quarter, we saw a sharp decline in demand.

If you now step out into April and look at that, early April started like the end of March, but in the second half of April, we’ve seen an uptick across really across the board. It’s not just related to a certain geo or a certain product. We think, by looking at it, a part of it is due to just our new products, a part of it is due to the stimulus programs taking effect in April, and then a part of it is probably the consumer behavior of knowing this is going to go on for a little while longer and getting some devices and so forth lined up to work at home more. In particular for as I think Luca shared, we believe that iPad and Mac are going to improve on a year-over-year basis during this quarter, and that’s customers that are either taking online education or working remotely. So, complex answer to your question, but that’s what we’re seeing.

Shannon Cross

Thank you. That was helpful. Luca, unless I missed it, you talked about various puts and takes in the quarter, but didn’t really discuss operating expenses. I know you mentioned some cost savings on the COGS line. I’m curious how you’re thinking about your spending and OpEx, given some of the macro challenges that you may be facing. Thank you.

Luca Maestri

Yes. So, Shannon, as we said, we manage the Company for the long term, right? So, we know that the core of the business, the core of the Company is innovation and product and services development. So, we will continue to invest in our pipeline. We’re very excited about what we have in store. And so, we will continue to invest there. Obviously, we are aware of the environment and so, we will manage the SG&A portion of the company tightly. We are making new investments in the new services that we launched recently. As you know, we purchased the baseband activities from Intel. And obviously, we want to develop that technology because we consider it’s a core technology for us. And so, we will try to balance the need to continue to invest during difficult circumstances and the fact that we like to manage the business wisely.

Tejas Gala

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

Operator

That will be from Wamsi Mohan from Bank of America.

Wamsi Mohan

Yes. Thank you. Tim, I think I speak for everyone on the call that we’re all very appreciative of Apple’s contribution during this pandemic. We all appreciate it.

Tim Cook

Thank you very much for that.

Wamsi Mohan

Tim, in past downturns, we have not really seen Apple pull back from investing. And you as a company have largely maintained the product introduction cadence. But given these are unprecedented times and there are a lot of challenges associated with product development, during a time when you have a global footprint for such activities and unable to really do a lot of things in person, how should we think about the product development and introduction cadence as we go over the next several quarters? And I have a follow-up.

Tim Cook

Well, we’re continuing to operate. And so, as you can tell, along with everything else going on, we were able to launch and ship the iPhone SE, the iPad Pro with the Magic Keyboard, and the MacBook Air. And so, the business continues and the new products are our lifeblood. And so, we’re continuing to work. Everybody’s getting used to the work-at-home. In some areas of the Company, people maybe even more productive, in some other areas they’re not as productive. And so, it’s mixed, depending upon what the roles are. But, as you can tell from what we did this quarter, despite the environment, we have our head down, are working because we know that our customers want the products that we’ve got. They’re even more important in these times.

Wamsi Mohan

Thank you, Tim. As a follow-up, I know you’re doing a lot with both the Apple Card and financing plan for iPhones to get your products in the hands of customers. But, I was wondering, would you consider using the strength of your balance sheet maybe a little differently, structure maybe deferred payments or things like that, or do you think that there could be other steps like bundling that you will consider versus what you already currently do? Thank you.

Tim Cook

Well, as you know, we launched the payment plan earlier on Apple Card for iPhone. We’re working on doing that for other products as well. And you’ll see something on that shortly. So, we’re very-focused on the affordability point. The trade-in programs also are fairly wide across the board and act as both something great for the environment, also something great from a way to get that entry price down. In terms of deferred payments, nothing to announce today. But, as you know, having access to the card, at least in the United States, gives us more degrees of freedom. And that is not using our balance sheet. But, we play a key role in deciding what kind of programs go with the card.

Tejas Gala

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

Operator

That will come from Morgan Stanley’s Katy Huberty.

Katy Huberty

Thank you for the question. I hope the whole team is staying healthy and safe. Tim, I want to start on a longer term question. Where do you see structural changes on the back of this health crisis that might present opportunities for new revenue streams at Apple? And I’m particularly thinking about your past comments on health and augmented reality. But I’m sure there is even more areas of inspiration and creativity coming out of the company. And then, I have a follow-up.

Tim Cook

I think, there are things from just a great reminder of how important our products are for remote work. And it’s pretty clear to me that where things will get a lot closer to normal than they are today, obviously. I think many people are finding that they can learn remotely. And so, I suspect that trend will accelerate some. I think that’s probably also true about working remotely in some areas and in some jobs. And so, I think we have significant solutions and products for all of those groups. On the health area, I gave some examples in my opening comments about the ECG being used on the Watch. You can bet that we’re looking at other areas in this. We were already doing that because we viewed that that area was a huge opportunity for the Company and a way for us to help a lot of people. And so, you will see us continue on that. I wouldn’t say that the health door opened wider. I would say, it was already opened fairly wide.

Katy Huberty

Okay. And then, as a follow-up, the $50 billion share repurchase authorization is impressive in absolute terms, but it is a bit lower than the last couple of years. So, just any context around the thought process of landing on $50 billion. And then, related to that, you have one of the strongest balance sheets in the world. Does the current environment change your thinking at all around M&A opportunities?

Luca Maestri

Let me answer that, Katy. First of all, on the buyback. As I said, in general, our approach to capital allocation has remained the same for the last several years and it’s not changing now. Keep in mind here, we’re talking about just the authorization, right? And when you look at our actual results at the end of every quarter, you see how much we actually do in terms of share repurchases. The $50 billion is in addition to over $40 billion that is still remaining from the past authorization that we’ve received from our Board, right? So it’s the total available or outstanding in terms of authorization is over $90. And as you look at our run rate during the last several years, you know that that is a very adequate amount. And as you know, we will provide an additional update a year from now. So, nothing really has changed there. And nothing has changed on our approach for M&A. We’ve been quite active over the last several years. We purchase companies on a very regular basis. We’re always looking for ways to accelerate our product roadmaps or fill gaps in our portfolio, both on the hardware side, on the software side, on the services side. So, we will continue to do that. And so, also on the M&A front, nothing has changed.

Tejas Gala

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

Operator

That will come from Amit Daryanani with Evercore.

Amit Daryanani

Thanks for taking my question. I have two as well. I guess, first off on the channel inventory. I was hoping if you could talk about how did channel inventory look like in the March quarter, because it sounds like it may be below the historical ranges. And then, the discussion you had for June quarter performance of iPhones, what are you embedding from a channel building back inventory levels in that expectation.

Tim Cook

Amit, it’s Tim. If you look at the iPhone channel inventory during Q2, the reduction of it was more than the reduction from the previous year. It’s not unusual that we reduce in Q2. In fact, if you look back, generally speaking, in the first half of the calendar year, we reduce channel inventories; during the second half of the calendar year, we generally raise channel inventories. That’s a seasonal thing. And sitting here today, I believe that will happen this year as well. So, hopefully, that answers your question. And by the way, we ended in a comfortable position. You could conclude from that that we were within a target range.

Amit Daryanani

That’s really helpful. Maybe just for follow-up. Tim, I was hoping you could maybe talk a little bit about, how do you think about Apple’s manufacturing strategy and perhaps need for some diversity, especially given everything in the Company and everyone has gone through over the last 12 months, how do you think about that? And do you feel comfortable that the supply chain and the manufacturing base is well situated today to launch the traditional fall products that they used to get from Apple?

Tim Cook

As you know, our supply chain is global. And so, our products are truly made everywhere. And I would focus on that versus focus on one element of the manufacturing process, which tends to get more visibility, which is the final assembly. We have some final assembly in the United States; we have final assembly in China as well. I think, you’d have to conclude, or at least I conclude that if you look at the shock to the supply chain that took place this quarter, for it to come back up so quickly really demonstrates that it’s durable and resilient. And so, I feel good about where we are. That said, we’re always looking at tweaks. And it’s just not something we talk about, because if we view it as confidential and competitive information. And so, we will look at the — as we get out of this totally, we will look to see what we learned and what we should change.

Tejas Gala

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

Operator

We’ll hear from Jeriel Ong with Deutsche Bank

Jeriel Ong

Hi, guys. Thanks for letting me ask a couple of questions. So, I want to focus my question on Services. The segment was solid in the quarter despite overall macro weakness. I can kind of see the logic behind it being strong despite product weakness overall. As you kind of look at the rest of the year, do you think that sustains or at some point does the macro impacts worldwide impact the Services line?

Luca Maestri

Jeriel, let me take that one. We typically don’t give a lot of specifics about our categories. But I’ve said, as we look into the June quarter, we see two distinct trends in our services business overall. Our ecosystem is very strong. Our customers are very engaged. We are continuing to grow double digits, the number of transacting accounts and paid accounts. And so, we expect our digital services to continue at the same level of performance that we have seen during the March quarter. And that includes the App Store, of course, our video business, our music business, cloud services. So, we expect all these businesses to continue to grow very strongly.

Given the overall economic environment, the level of demand right now, there are two businesses that we believe are going to be impacted during the June quarter. One of them is AppleCare. AppleCare is essentially comprised of our product repair business and the warranty agreements that we signed with our customers when they purchase our devices. Both these businesses have been affected obviously by the store closures. And not only our retail stores, but also our partners points of sale, and obviously, the reduced level of customer traffic because of the social distancing measures. Right? And we do expect AppleCare to be affected during the during the June quarter.

The other business, which we think is going to be impacted by the overall economic weakness and the uncertainty on when businesses will reopen is advertising, which is the sum of our advertising business on the App Store, on Apple News, and the third party agreements that we have on the advertising front. So, these are two things that during the June quarter will create a headwind for the Services business.

Jeriel Ong

Got it. I appreciate that. My second question is about the overall purchasing decisions the consumers are making. So far, through April, have you seen increased perhaps downtick across your product line? So for example, somebody might have shift maybe toward the lower end of the storage mix of certain products. And do you expect that going forward, as unemployment uptick and macro impacts kind of layer on through the rest of ‘20? Thanks.

Tim Cook

I haven’t seen what you’re asking. No. I have seen a strong customer response to iPhone SE, which is our most affordable iPhone. But it appears that those customers are primarily coming from wanting a smaller form factor with the latest technology, or coming over from it from Android. So, those are the two principal kind of segments versus somebody buying down, as you’re talking about it. We’ve also seen — we launched the iPad Pro in the midst of all of this and the reception there has also been incredibly good. And that’s obviously our top of the line iPad. And so, I’m not seeing what you’re alluding to, at least at this point.

Tejas Gala

Thanks, Jeriel. Can we have the next question, please.

Operator

That will be from JP Morgan’s Samik Chatterjee.

Samik Chatterjee

Hi. Thanks for taking my question. If I can just start with a question on kind of what you’re seeing in China. You mentioned going to the pickup in activity. But, is that driven by more kind of footfall in the stores, or what’ve you seen relative to online activity, and how much of this recovery is being driven online? Any thoughts on that, please?

Tim Cook

Yes. What we saw in China for the full quarter — and I’ll speak about mainland China because I think that’s the source of your question. We saw strong results in iPad and in Wearables, and in Services. And if you look up underneath the full quarter, we saw a strong January, and then a significantly reduced demand in February as the shelter-in-place orders and the lockdowns went into effect in China and the stores closed. And then, in March, as stores reopened, the recovery began. And then, we’ve seen further recovery in April. Where that goes, we will see. But that’s kind of what we’ve seen so far there.

To your question about store traffic, store traffic is obviously up from where it was in February, but it is not back to where it was pre the lockdown. There has been, however, more move to online. And as I mentioned earlier in my remarks, it’s pretty phenomenal actually. Retail had a quarterly record for us during the quarter. And that’s despite stores being closed for the three-week period around the world. And ex China — and then China was closed prior to that three weeks. And that’s partly because the online store had such a phenomenal quarter, and that included in China, but it was also other regions as well. So, there is definitely a move. And whether that’s a permanent shift, I would hesitate to go that far, because I think people like to be out and about. They just know that now is not the time to do that.

Samik Chatterjee

If I can just follow up on your previous comment about the strong demand you’re seeing for iPhone SE. Just given the price point, I’m wondering if you are expecting any change in terms of the geographic mix of where the demand comes from relative to typically what do you see for other iPhones from the line up on, just giving the lower price point?

Tim Cook

I think, it plays in every geo, but I would expect to see it doing even better in areas where the median incomes are less. And so, we’ll see how that plays out. And I expect some fair number of people switching over to iOS. So, it’s an unbelievable offer. It’s, if you will, the engine of our top phones in a very affordable package. And I think — and it’s faster than the fastest Android phones. And so, it’s an exceptional value.

Tejas Gala

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

Operator

Certainly. Our last question today will be from Chris Caso with Raymond James.

Chris Caso

Yes. Thank you. I wanted to follow up with another question on iPhone SE and the decision to bring it back and where it sits within the total iPhone strategy. And I guess, coupled with the fact that iPhone 11, you made the decision to bring that at a lower price point. What does that tell us with respect to your approach to iPhone pricing and flexibility? Is this helping to add users and kind of bring people into the ecosystem? And if so, what does that imply for gross margins?

Tim Cook

Chris, we’ve always been about delivering the best product at a good price. And that fundamental strategy has not changed at all. As you know, we did have an SE for a while. It’s great to bring it back. It was a beloved product. And so, I wouldn’t read anything into that other than we want to give people the best deal that we can while making the best product.

Chris Caso

Okay. As a follow-up — the follow-up question is on commodity pricing. And I think, you had expected to see some commodity price declines through the March quarter. If you could talk about what you expect, as you go through the year, perhaps in this new environment, and again, whether that turns into a challenge or a headwind for gross margins as you go into the second half?

Tim Cook

Yes. For March, Chris, we saw NAND pricing increase slightly while DRAM and displays and the other commodities declined. For the June quarter, we would expect NAND and DRAM pricing to remain at this historically low level, while displays and most other commodity prices we expect to decline.

Tejas Gala

Thank you, Chris. A replay of today’s call will be available for two weeks on Apple Podcasts as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 8888-203-1112 or 719-457-0820. Please enter a confirmation code 3229513. These replays will be available by approximately 5 pm Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us.

Operator

And that does conclude today’s conference. Thank you all for joining us today.

Let's block ads! (Why?)



Business - Latest - Google News
May 01, 2020 at 01:58PM
https://ift.tt/3aS5B3X

Apple Inc. (AAPL) CEO Tim Cook on Q2 2020 Results - Earnings Call Transcript - India Gone Viral
Business - Latest - Google News
https://ift.tt/2Rx7A4Y


Bagikan Berita Ini

0 Response to "Apple Inc. (AAPL) CEO Tim Cook on Q2 2020 Results - Earnings Call Transcript - India Gone Viral"

Post a Comment

Powered by Blogger.