Apple Inc ($AAPL) Q3 2020 Earnings Call

Thanks, Tejas. Good afternoon, everyone. Thanks for joining the call today. Before we begin, I join the many millions across this country in mourning and memorializing 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 in 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 $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 risk 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 meant responsibly reopening our operations and retail stores with enhanced health and safety precautions. In others, where the virus has reemerged, it's meant taking the challenging but necessary step of reclosing stores. I'll touch on these topics more in a little bit, but first I want to offer some more context on the quarter's results. Due to the uncertain and ongoing impacts of COVID-19, we did not provide our typical guidance when we reported our results last quarter, but we did provide some color on how we expected the June quarter to play out. I'd like to contextualize our results in terms of that color across each of our product categories. Beginning with iPhone, iPhone revenue grew 2% this quarter. In April, we expected year-over-year performance to worsen, but we saw better than expected demand in May and June. We attribute this increase in demand to several interactive causes, including a strong iPhone SE launch, continued economic stimulus, and potentially some benefit from shelter-in-place restrictions lifting around the world. We expected iPad and Mac growth to accelerate, and we saw very strong double-digit growth for these devices this quarter. This remarkable performance came in spite of supply constraints on both products. We're working hard to get more iPads and Macs into customers' hands as quickly as possible, recognizing how integral they have become to working and learning from home, providing entertainment and staying connected with loved ones. Wearables growth decelerated as we expected, but still grew by strong double digits and set a revenue record for a non-holiday quarter. Building on powerful new features built into Watch OS 7 and AirPods Pro announced this quarter, we are very excited about the many opportunities in front of us for this product category. These strong results help drive our install base of active devices to new all-time records across each of our product categories. Reflecting the deep integration of hardware, software, and services, services generated a June quarter record of $13.2 billion, up 15% year-over-year. As we mentioned during our last call, there were two distinct trends we were seeing, and they played out as we thought. First, results for advertising and Apple Care were impacted by the reduced level of economic activity and store closures to a degree that was in line with our expectations. Second, we had strong performance in our digital services with all-time revenue records in the App Store, Apple Music, video, and cloud services, as well as elevated engagement on iMessage, Siri, and FaceTime. Customers are loving new offerings across Apple services like Apple News Today, our new daily audio briefing, and Greyhound, our new summer blockbuster starring Tom Hanks. In fact, Apple TV Plus just hit a history-making 95 awards nominations and 25 wins and accolades. Based on these results and our performance over the last four quarters, we are proud to announce that we have achieved our goal of doubling our fiscal 2016 services revenue six months ahead of schedule. We're conscious of the fact that these results stand in stark relief during a time of real economic adversity for businesses large and small and certainly for families. We do not have a zero-sum approach to prosperity. And especially in times like this, we're focused on growing the pie, making sure our success isn't just our success, and that everything we make, build, or do is geared toward creating opportunities for others. The App Store is a great example. This quarter, a new study by independent economists at the Analysis Group found that the App Store facilitated more than half a trillion in commerce globally in 2019 alone. Especially in a time of COVID-19, you can measure economic resilience in the ways in which the App Store supports remote ordering for restaurants, digital commerce for small businesses, and an enduring entrepreneurial opportunity for creators and visionaries. Keeping learning vibrant and impactful in the time of COVID-19 is a priority everyone shares. Earlier this month, we announced significant enhancements to the Develop in Swift and Everyone Can Code curricula and we launched a new professional learning course available exclusively to educators. And just two weeks ago, our Community Education Initiative added 10 more historically black college and university regional coding centers to our roster, bringing the total to 24 locations nationwide, 12 of which are HBCU and 21 of which serve majority Black and Brown student populations. In Apple's backyard, we announced that we're allocating $400 million of our multi-year, $2.5 billion affordable housing commitment to new housing construction, home buyer assistance programs, and support for those at greatest risk of experiencing homelessness across Silicon Valley. Apple's results this quarter are only possible due to our people and their ongoing ingenuity, flexibility, resilience, and determination during these ever-changing times. I want to thank our Apple Care and retail teams who have paired exceptional service during a time of intense demand with great adaptability during a quarter where stores have reopened in some places and reclosed in others. A dedicated team of specialists and experts has shouldered the task of caring for the well-being of our teams and communities store by store, location by location, with evidence-driven granularity and agility that is unrivaled anywhere. Innovation from adversity certainly defined this year's Worldwide Developers Conference as well. This is an event where traditionally Apple's worldwide community of developers gathers together to share, celebrate, and do big things together. Though we could not be together in person, Apple set a new standard for what online events can achieve with our celebrated all-virtual event. The results here speak for themselves. More than 22 million viewers tuned in across all of Apple's streams. For our developers, we distributed more than 72 hours of video content. That's three full days of video. The week saw more than 200 direct-to-video engineering and design sessions and about 4,500 person-to-person appointments with developers across 227 virtual labs. And of course, that's even before you get to this year's announcements. From iOS 14, which boasts a radical redesign to the home screen, powerful updates to messages, streamlined and effortless app clips, and even greater privacy transparency and controls to major updates to Apple Pencil, Siri, and calling in iPad OS 14 to much-anticipated sleep tracking, new fitness and wellness features, and unprecedented customization in Watch OS 7 to the new macOS Big Sur boasting the biggest redesign upgrade to macOS since OS X. No less important for Apple's innovation roadmap is our transition to Apple Silicon for the Mac. This two-year effort will achieve both unprecedented performance for the Mac and a common architecture across all Apple products. Looking forward, we are profoundly optimistic about Apple's future. And we recognize that with this success comes a real responsibility to lead with our values because those values help make that success possible in the first place. We are just as proud of our announcement this month that Apple will be fully carbon neutral by 2030 across our entire supply chain and including the energy use of every device we make as we are of any hardware innovation because they spring from the same instinct to leave the world better than we found it. We're committed to standing with those marching for their lives and dignity through our new $100 million commitment to Apple's Racial Equity and Justice Initiative. And we're deepening our diversity and inclusion efforts internally because our future as a business is inextricably linked with the future of our communities. There are times when things seem to move slowly, when needed progress, economic or social, seems bogged down, when the instinct to turn away from the horizon and hold on to what you've got feels inescapable. And then there are times like this when people of goodwill step forward, when progress unmores itself, when the insistence of hope forces something new. This is an immensely challenging moment. COVID-19 is still devastating many places and we have work left to do to care for the health and well-being of the communities in which all of us live and work. But no community of people, whether a company or a country, can afford to miss this call when it comes. At Apple, we never have and we don't intend to start now. With that, I'll hand things off to Luca.

Yeah. As Luca mentioned, in June, we actually rolled out to the overwhelming balance of our other products the ability to do 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.

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 install 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. In Japan, we had the top four. In urban China, iPhone 11 was the top selling smartphone in the country. And so, these are some very different geographies with 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 seemed to appeal to some people that were holding on to 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 Luca said in his outlook, we do see that continuing into this quarter currently.

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 Plus. 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 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 shot in the LA area. Given the current status of the virus and those, and I'm sorry I missed the second part of your question.

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.

Yeah Shannon, the growth that we saw, we did see growth in Greater China for the quarter of 2%. Currency affected China a bit more than in other places, 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 bestselling 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.

Yeah, I mean what we'll wind up with is a common architecture across all of our products which gives us some interesting things that we can do in products that sort of unleashes another round of innovation. And so I don't want to say a lot about it other than we're 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.

I think Amit it's a combination of a strong launch with iPhone SE and some probably some pickup 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 stores 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 a strong cycle plus an iPhone SE launch plus the reopening of the stores, etc., I think there were a lot of things that were going in the right direction there.

Customers upgrade at a different pace and I don't have in front of me the exact install base data from China but I mean much like in other geographies the upgrades have extended some during the depths 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 a product that people can't imagine going through life without and obviously keep rolling out these programs that make the front-end purchase be much less. And this is things like the financing and the trade-in programs that you mentioned and I do feel like those are going quite good in a number of geographies.

The install base is growing and the new customer numbers that Luca went over in the aggregate are still very high, you know, in the close to 50% kind of range. And so that to me makes the bode well for the future. There's clearly as we had indicated there's 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. 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.

You know, we usually have, 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.

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. 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 wound up being very pleased with how we did, but the store closures definitely affect the wearables and the iPhone.

Yeah, we take it one quarter at a time and so we'll give you a color on the December quarter in October. Generally speaking I think we need to see a vaccine or therapeutic or both and there's some optimism around that and in that particular time frame and so we'll see. I don't have any information that isn't publicly available there but I think that would boost consumer confidence quite a bit if it began to happen and I think that any kind of consumer-style company would benefit from that.

We saw changes in consumer spending as the shutdowns occurred and then store closures occurred. We could see that across the card. It affected the categories that you would guess the most like travel and entertainment etc. 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 an 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.

Well, I don't want to make a forever comment, but we're a product company and we love making the whole thing and because we can own the user experience in that way and with a 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.