Subtitles section Play video Print subtitles 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.