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

  • Call.

  • Today's call is being recorded.

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

  • Paxton, Senior Director of IR.

  • Please go ahead.

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

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

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

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

  • for introductory remarks.

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

  • the strong performance of iPhone, services and wearables.

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

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

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

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

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

  • year.

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

  • First, iPhone had a very strong quarter.

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

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

  • we greatly appreciate.

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

  • score of 98% according to 451 Research.

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

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

  • Russia, Mexico and the Middle East and Africa.

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

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

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

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

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

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

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

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

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

  • overall services business.

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

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

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

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

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

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

  • apps than ever before.

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

  • of Google Play so far in 2018.

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

  • of millions of people around the world.

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

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

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

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

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

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

  • Italy and Spain.

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

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

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

  • distribution initiative.

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

  • Our communications services are experiencing record usage.

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

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

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

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

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

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

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

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

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

  • forward to adding Germany later this year.

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

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

  • nationwide this fall.

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

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

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

  • the US less than eight months following its launch.

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

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

  • from the March quarter.

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

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

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

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

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

  • I went.

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

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

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

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

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

  • tvOS.

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

  • participating in our new OS beta programs.

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

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

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

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

  • and more responsive.

  • Camera launches up to 70% faster.

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

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

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

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

  • with their iOS devices.

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

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

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

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

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

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

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

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

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

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

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

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

  • and experience the world.

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

  • ecosystem to the Mac with minimal effort.

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

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

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

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

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

  • these great new tools to our developers next year.

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

  • even more great reasons to choose Mac.

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

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

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

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

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

  • widgets on webpages from tracking users without their permission.

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

  • by ads.

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

  • watchOS 5.

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

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

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

  • on the Siri watch face.

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

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

  • services.

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

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

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

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

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

  • movies.

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

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

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

  • products and services.

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

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

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

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

  • into the China Clean Energy Fund.

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

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

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

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

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

  • the upcoming school year.

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

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

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

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

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

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

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

  • and Mac.

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

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

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

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

  • business.

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

  • over to Luca.

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

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

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

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

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

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

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

  • more than 20%.

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

  • offset the seasonal loss of leverage.

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

  • June quarter record.

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

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

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

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

  • the world.

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

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

  • and Africa.

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

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

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

  • iPhone channel inventory.

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

  • industry.

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

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

  • was even higher at 98%.

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

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

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

  • billion.

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

  • final resolution of various lawsuits.

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

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

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

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

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

  • over $3.7 billion.

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

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

  • revenue grew dramatically during the quarter.

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

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

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

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

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

  • who are new to Mac.