Apple Inc.
Q3 2020 Earnings Call Transcript

Published:

  • Operator:
    Good day, everyone. Welcome to the Apple Incorporated Third 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 things over to Mr. Tejas Gala, Senior Manager, Corporate Finance and Investor Relations. Please go ahead, sir.
  • Tejas Gala:
    Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts.
  • Tim Cook:
    Thanks, Tejas. Good afternoon, everyone. Thanks for joining the call today. Before we begin, I joined the many millions across this country in mourning and memorialize Congressman John Lewis, who was laid to rest earlier today. We've lost a hero who walked among us, a leader in the truest sense who urged this country to aim higher and be better until the very end. I was humbled and fortunate to know him and as an Alabama native his example inspires me still. It now falls to every American to be a living memorial to John Lewis and to carry forward the work and the mission that defined his life. Throughout the call I'll speak in greater detail about Apple's support for equity and justice topics of great urgency on a number of fronts, but first I want to pull the lens back to consider the quarter and full. In an uncertain environment Apple saw a quarter of historic results demonstrating the important role our products play in our customers' lives. We set a June quarter record with revenue of $59.7 billion, up 11% from a year ago. Both products and services set June quarter records and grew double-digits and revenue grew in each of our geographic segments, reflecting the broad base of this success. As always and especially in times of real adversity, what makes us proud as a company is not merely what we did, but how we did it. As millions March for justice in big cities and small towns alike, we committed a $100 million to launch Apple's racial equity and justice initiative as well as new and renewed internal efforts to foster diversity and inclusion at all levels of the company. As COVID-19 continues to represent great risks for individuals and great uncertainty for our communities, care and adaptability are defining how we conduct our work wherever we work. In some places that has met responsibly reopening our operations and retail stores with enhanced health and safety precautions. In others, where the virus has reemerge it's meant taking the challenging, but necessary step of re-closing stores.
  • Luca Maestri:
    Thank you, Tim. Good afternoon, everyone. Our June quarter was a testament to Apple's ability to innovate and execute during challenging times. Our results speak to the resilience of our business and the relevance of our products and services in our customers' lives.
  • Tejas Gala:
    Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we please have the first question?
  • Operator:
    Yes, that will be from Katy Huberty with Morgan Stanley.
  • Katy Huberty:
    Thank you. Good afternoon. Tim in light of the economic adversity that you talked about in the prepared remarks, can you just walk us through how Apple is leveraging finance and trade-in programs to make technology more affordable and accessible during this period, while also addressing the opportunity to recycle and reuse products and maybe also extend that to how these programs might expand over time and then I have a follow-up.
  • Tim Cook:
    Yes. As Luca mentioned, in June we actually rolled out to the overwhelming balance of our other products the ability to do interest rate, interest free financing in our stores with payments. And that's in addition to trade-in which is becoming a more common trend now which I think is terrific because it is great for the environment and it acts as a subsidy, if you will, against the price of the new phone. And so when you compound these two things with the financing and the trade-in it makes the product super affordable. And we're really happy with what we're seeing in that regard.
  • Katy Huberty:
    And then, as a follow-up, just specifically to iPhone the category returned to growth. As you pointed out, the installed base is larger today. Our math would suggest that replacement cycles in some cases are elongated. And then you have the affordability element that you just discussed. Does all of that combine to build confidence that we're entering a longer period of iPhone revenue growth after what's been six quarters of decline?
  • Tim Cook:
    We're very pleased with how we did on iPhone. It was better than we thought largely because as we pointed out in the prepared remarks May and June were much better. If you look at iPhone in totality the things that get me very optimistic is the size of the active installed base. The fact that if you look in the major geographies like the US, we had the top two selling smartphones. In the UK we had three of the top four. In Australia, we had five of the top six. And in Japan we had the top four. Urban China we were, iPhone 11 was the top selling smartphone in the country. And so these are some very different geographies with their very different competitive situations and we're doing fairly well. The iPhone SE, it's also clear that from the early data we're seeing a higher switcher number than we did in the previous year, which we feel very good about. And it also seems to appeal to some people that were holding onto the device a little longer because they wanted a smaller form factor phone. And so the combination of the smaller form factor and an incredibly affordable price made the iPhone SE very popular. iPhone 11 is still the most popular smartphone, but iPhone SE definitely helped our results. And as we -- as Lucas said in his outlook, we do see that continuing into this quarter currently.
  • Tejas Gala:
    Thank you, Katy.
  • Katy Huberty:
    Thank you. Congrats on the quarter.
  • Tim Cook:
    Thank you so much.
  • Tejas Gala:
    Can we have the next question, please?
  • Operator:
    Yes, that would be from Krish Sankar with Cowen & Company.
  • Krish Sankar:
    Hi, thanks for taking my question. I have two of them. First one, Tim, when you look at the services business and in terms of your TV+ content production have the movement restrictions impacted the content production efforts? And along the same path four years ago your premonition on services being a $50 billion business in 2020 came sooner than expected, I don't know if you want to make any such forecast four years out and how you think services revenue is going to be. Then I have a follow-up for Luca.
  • Tim Cook:
    I'm sorry. I missed that second question because the audio didn't come through. But I think I got the gist of the first. And that is production has been affected for Apple TV+ as I think it has for most people. We are working to get restarted. I don't have a precise date yet when we will get it restarted, but there will be some impact because we shut down in the March time frame and are yet to really restart in a significant way particularly for those that are shut in the LA area given the current status of the virus and those. And I'm sorry I missed your, the second part of your question.
  • Krish Sankar:
    Yes, Tim, I was trying to see, four years ago you made a great prediction that services is going to be $50 billion by 2020. I wanted to see if you have any update to the prediction four years down the road?
  • Tim Cook:
    We're not updating today. We feel good. We want to take the moment and feel good about achieving the doubling six months early. And we do have still hanging out there, as you know, the subscription number that we're shooting for later in the year at 600 million. So we do have that objective out there.
  • Krish Sankar:
    If I could just squeeze in one for Luca. With the strong sales in Mac given the shelter-in-place, do you think the back-to-school season got pulled in by a quarter or do you expect the momentum to still continue? Thank you very much.
  • Luca Maestri:
    As I said, when I was talking about providing some commentary for the September quarter, we expect all the non-iPhone product categories to have a very strong year-over-year performance. So we definitely, I mean, the back-to-school season is clearly this one and we are very excited not only for the Mac, but also for the iPad. We've got a fantastic lineup of products and we know that these products are incredibly relevant especially given the current circumstances. So we expect the performance that we've seen for Mac in the June quarter to continue.
  • Tejas Gala:
    Thank you. Can we have the next question, please?
  • Operator:
    Yes. From Cross Research we'll hear from Shannon Cross.
  • Shannon Cross:
    Thank you very much. Tim, can you talk a bit about what you're seeing in China? I know the revenue was up 2% and I think Luca talked about record iPad, but just curious as to given their 5G how you're seeing the market play out? And then I have a follow-up. Thank you.
  • Tim Cook:
    Shannon, the growth that we -- we did see growth in Greater China for the quarter of 2%, currency affected China, a bit more than in other places, it affected 400 basis points. And so in constant currency, we would have grown at 6%. As I had mentioned before, the iPhone 11 has been our best-selling phone and has been number one in urban China and so we're very, very proud of that. iPad was helped in the June quarter there by the work from home and distance learning as it was in other geographies and the Mac also grew strong double digit during the quarter. And services set a new June quarter record there. We also continue to see extremely high new customer rates on Mac and iPad there, to give you a perspective, about three out of four customers that are buying the Mac are new in China and about two out of three that are buying the iPad are new. And so these are numbers that we're super proud of.
  • Shannon Cross:
    Great. And then, can you talk a little bit more about the decision to bring Mac Silicon in-house, then the benefits that you expect to see or you've seen from vertical integration of acquisitions like the Intel modem business? Thanks.
  • Tim Cook:
    Thanks. Yes, I mean, what we will end up -- what we'll end up with is a common architecture across all of our products, which gives us some interesting things that we can do in products that are -- that is sort of unleashes another round of innovation. And so I don't want to say a lot about it, other than we are extremely excited about it, it's something that we've worked on quite a while to get to this point and we're looking forward to shipping the first Mac with Apple Silicon later in the year.
  • Tejas Gala:
    Thank you, Shannon. Can we have the next question please.
  • Operator:
    That will come from Amit Daryanani with Evercore.
  • Amit Daryanani:
    Thanks a lot for taking my question guys. I have one and a follow-up as well. Fortunately, I guess, Tim, if I think about the strength, you're seeing with iPhones right now, do you have a sense in terms of where is this trend coming from? Is it more replacement cycles getting shorter or which is getting new customers into the iOS ecosystem because, clearly these growth rates seem fairly impressive in the context of a pandemic and upcoming refresh cycle that we have?
  • Tim Cook:
    I think, Amit, it's a combination of a strong launch with iPhone SE and some -- probably some pick up because of the economic stimulus that hit different countries at different points in time. And probably some of the reopening that took place across the quarter, particularly in May and June as Store started to reopen. And so it's a combination of all of those. And as you know, we've been having a strong cycle with the iPhone 11 and the 11 Pro. And so when you combine the -- a strong cycle plus and iPhone SE launch, plus the reopening of the stores, et cetera, I think there were a lot of things that we're going in the right direction there.
  • Amit Daryanani:
    Perfect, that's helpful. And then I guess, Luca, if I could just follow up with you. I'd love to get your perspective on how do we think about the overall 38% gross margins? What do you think of the levers to improve this as you go forward, not really September quarter, but over the next one to two years? And in that context, do you see a point where the product gross margin starts to stabilize because they have been trending somewhat lower for the last couple of quarters now.
  • Luca Maestri:
    Yes. Well, let me start with what we've seen during the June quarter. We were at 38%, we were down slightly sequentially but up the same amount on a year-over-year basis. And really the big negative impact that we felt for several quarters now has been the strength of the US dollar, so the foreign exchange impact on a sequential basis was 90 basis points on a year-over-year basis was 130 basis points. So obviously that is something to keep in mind. And then, the other aspect; I think it's always important to keep in mind, Amit, is that we sell many different products. They have different margin profiles. And so sometimes a different mix can have an impact on the aggregate level of products gross margins and we are very pleased to see the performance of Mac, iPad and Wearables but obviously, it's a different mix. Going forward, the variables are always the same, is that the foreign exchange will continue to play an impact, the mix of products there, we're going to be selling, will have an impact as well. The commodities market has been relatively benign and we'll see how that plays out over time. As you know now for several years, we've been managing gross margin, I would say, fairly well in spite of some difficult situations like the one with the strength of the dollar and we plan to continue to make a good trade off decisions between revenue and units and margins.
  • Tejas Gala:
    Thank you, Amit. Can we have the next question, please?
  • Operator:
    It will come from Kyle McNealy with Jefferies.
  • Kyle McNealy:
    Hi, thanks a lot for the question. Our team in Asia recently, we did some survey work on smartphones in China. It showed that there is still a high proportion of the installed bases on 6, 7, 8 devices. I know you talked about the trade-in programs and promotions that you've been doing there. I wonder if you can tell us whether there is anything else that you're doing to get these customers in your latest technology? What made those customers be looking for and how should we think about when an upgrade cycle might come on more strongly there in China? Thanks.
  • Tim Cook:
    Customers upgraded different at a different pace and I don't have in front of me the exact installed base data from China. But much like in other geographies, the upgrades have extended some, it extended some during the depths if you will of the pandemic in China and the rest of the world, and probably to some degree is happening still at this point. The key things that we can do is keep innovating, deliver product that people can't imagine, going through life about. And obviously keep rolling out these programs that makes the front-end purchase be much less, and this is things like the financing in the trade-in programs that you mentioned. And I do feel like those are going quite good in a number of geographies.
  • Kyle McNealy:
    Okay, great, thanks. And one more if I may. Congrats again on the strong iPad and Mac results, that's really impressive. I guess the obvious question is, should we ever think about how much of that might be pull-forward and what might be the future upgrades in next few years? Anything else you can share on how you think about growth from here or whether there is a hangover period maybe after the back-to-school season or holiday season. That would be helpful. Thanks.
  • Tim Cook:
    The installed base is growing and the new customer numbers that Luca went over in the aggregate are still very high in the close to 50% kind of range. And so, that to me, makes the -- bodes well for the future. There is clearly, as we had indicated, there is some amount of work from home and remote learning that do affect the results of Mac and iPad positively. They probably affect wearables and iPhone, the other direction. And -- but on Mac and iPad, these are productivity tools that people are using to stay engaged with their work or stay engaged with their school work. And we believe we're going to have a strong back to school season. Sitting here today, it certainly looks like that.
  • Tejas Gala:
    Thank you, Kyle.
  • Kyle McNealy:
    Great. Thanks very much.
  • Tejas Gala:
    Can we have the next question, please?
  • Operator:
    That will come from Cleveland Research's Ben Bollin.
  • Ben Bollin:
    Good evening, everyone. Thanks for taking the question. Tim, I was hoping you could share a little bit about where you think channel inventory is? You talked about the tightness you saw exiting the June quarter for Mac and iPad. Interested, where you think inventory is across major product categories. And then I had a follow-up for Luca.
  • Tim Cook:
    We usually -- we've gotten away from talking about channel inventories. But to give you a perspective sitting here looking at it, on iPhone the inventory is slightly less than it was a year ago and that's I'm saying that at a quarter end point, so at the end of Q3. And obviously iPad and Mac are constrained and so both of those are less than they were in the year ago quarter.
  • Ben Bollin:
    Okay. And then, Luca, I'm interested, any color you could share about the impact COVID had on OpEx in the quarter, be it work from home, stipends, travel, other employee support costs. And also how the company is thinking about the longer-term opportunity of employees working remotely maybe more permanently many considerations and how that could influence the future OpEx? Thanks.
  • Luca Maestri:
    Well, on the OpEx front, there are being obviously certain things that have been affected in terms of cost reductions. Obviously, travel, it is a perfect example. The number of meetings that we have internally, some of those costs have been reduced. We've also invested heavily in initiatives for example, we're really trying to help during a very difficult circumstances. For example, we have had a program for example where we match our employee donations, we made donations directly as a company around the world to many institutions and governments. On a net basis, I would say probably the cost have outweighed the savings both during the March and the June quarter, but we think it's absolutely the right thing to do. From an employee perspective, what we said so far is that here in the United States, in most -- the majority of our population will continue to work from home until the end of the year. And then we'll see, I mean, we've taken an approach that we try to understand how the virus is evolving over time. We've taken a very cautious approach of both with our corporate facilities and with our retail stores. I think what you've seen with retail stores is that we have reopened in number of geographies around the world. We've reopened here in the United States. We've had to re-close some of the stores yet here in the United States, as the number of cases has gone up. And we will continue to track how the virus is doing. And hopefully at some point, we're going to get to a point where there is a vaccine or there is a cure. And so we will make those decisions as we get more information.
  • Tejas Gala:
    Thank you. Can we have the next question, please?
  • Operator:
    That will be from Jeriel Ong with Deutsche Bank.
  • Jeriel Ong:
    Yes, thank you so much. I have two questions as well. I'd like to focus on the gross margin expansion within the services line all-time record for the quarter. I'm just curious whether you think that will sustain, I understand within services is a pretty wide range of gross margins by business, and I'm wondering if that should continue to improve.
  • Tim Cook:
    Well, as you've seen, obviously, we've had a sequential expansion in gross margin for services. And that was driven primarily by mix as you said, right. We have a very broad portfolio and depending on which one of the services does better than we have an impact on Services gross margins. We like the Services business because it is -- it's a recurring type of revenue and the margins are accretive to company margin. We did over 67% this quarter, but we want to offer very competitive services across the board and the same -- I think I'm going to make the same comments that I made on products. What matters to us is to be successful with everything that we do and provide great products and services to our customers. So the relative success of our products and services in the marketplace will drive to a certain extent with our margins are, that's the margins are a byproduct of our success in the marketplace.
  • Jeriel Ong:
    Got it, really appreciate that. And I wanted to ask question on the Wearables segment. It seems to me that you're categorizing the Wearables business as maybe being a little bit impact from pandemic similar to the iPhones. And it's the first time that Wearables hasn't materially upsided and at least a while in recent memory. I guess the drivers of the Wearables being Watch and predominantly Watch and AirPods. What are your thoughts going forward on whether there is a little bit of pent-up demand perhaps that might resume ads that will get back to a more normalized environment?
  • Tim Cook:
    I think on the Watch in particular is like the iPhone more affected by store closures, because people -- some people want to try on the Watch and see what it looks like, look at different band choices and those sorts of things. And so I think as stores closed, it puts more pressure on that. I was -- we did come out sort of the way we told you last quarter, we were going to come out from the color that we gave you. So we knew things would decelerate because of the closures. So we will end up being, we're very pleased with how we did. But the store closures definitely affect the wearables and the iPhone.
  • Tejas Gala:
    Thank you, Jeriel.
  • Jeriel Ong:
    Got it. Really appreciate that.
  • Tejas Gala:
    Yes. Can we have the next question, please?
  • Operator:
    That will come from Jim Suva with Citigroup.
  • Jim Suva:
    Thank you very much. And I have two questions. I'll ask them at the same time and it's one for Tim and one for Luca. Tim, the coronavirus, your company has done a fantastic job at overcoming one of the hurdles. So congratulations to you. As you look forward, say to the Christmas holiday shopping season, and given the economic challenges around the world of virus, coronavirus and your product launches and things like that. Can you give me commentary maybe how this Christmas you're looking forward, to say, maybe some past cycles of Christmas? Because it just seems like it's a little bit different, but Apple is really showing a lot more strength coming into this Christmas than may be some of the past years. And then for Luca, I think you made a quick comment, Luca, that you mentioned something about a few weeks later, was Apple like iPhone, iPhone chips or product launches or maybe expand upon that. I know things are more difficult, but I didn't quite keep the commentary, it was in your prepared comments, we'll go about a few weeks late that let's just have a quick little blood. Thank you so much, gentlemen.
  • Tim Cook:
    Yes, we take it one quarter at a time. And so, we'll give you color on the December quarter and October. Generally speaking, I think we need to see a vaccine or therapeutic or both. And there is some optimism around that and in that particular timeframe. And so, we'll see, I don't have any information that is publicly available there. But I think that would boost consumer confidence quite a bit if it begins to happen and I think that any kind of consumer style company would benefit from that.
  • Luca Maestri:
    And Jim, on the iPhone, I said in my remarks that we launched a year ago, we launched the new iPhone in late September. So I was referring to the new product. And I said that this year, the supply of the new product will be a few weeks later than that.
  • Jim Suva:
    Great. Congratulations to you and your entire organization and teams. Thank you so much.
  • Tim Cook:
    Thanks so much.
  • Tejas Gala:
    Thank you. Can we have the next question, please?
  • Operator:
    That will come from Wamsi Mohan with Bank of America.
  • Wamsi Mohan:
    Hi. Yes, thank you. I was wondering if you can maybe comment on the penetration of Apple Card users in the iOS installed base? And have you seen any change in the buying behavior of Apple Card users in terms of accelerating spend on more Apple products and services? Then I have a follow-on.
  • Tim Cook:
    We saw changes in consumer spending as the shutdowns occurred and the store closures occurred, we could see that across the Card. It affected the categories that you would guess the most like travel and entertainment et cetera. But overall if you sort of pull the lens out on the Apple Card, we're very happy with the number of people that have Apple Card. We believe based on what we've heard that it's the fastest rollout in the history of credit cards and so we feel very good about that.
  • Wamsi Mohan:
    Okay. Thanks, Tim. And as a follow-up, now that Apple has Apple Silicon for Macs. Would you ever consider monetizing this as a merchant silicon vendor or is this going to be forever for Apple use?
  • Tim Cook:
    Well, I don't want to make a forever comment, but there are -- we are a product company and we love making the whole thing. And because if we can -- on the user experience in that way and with the goal of delighting the user. And that's the reason that we're doing the Apple Silicon is because we can envision some products that we can achieve with Apple Silicon that we couldn't achieve otherwise. And so that's how we look at it.
  • Wamsi Mohan:
    Thanks, Tim.
  • Tejas Gala:
    Thank you, Wamsi. A replay of today's call will be available for two-week on Apple podcasts as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 2630782. These replays will be available by approximately 5
  • Operator:
    And again, that will conclude today's conference.