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Apple, Inc. (AAPL) CEO Tim Cook at Q2 2019 Results – Revenue Call

Apple, Inc. (NASDAQ: AAPL) Q2 2019 World Conference Call April 30, 2019 17:00 ET

Company Participants

Nancy Paxton – Senior Director, Investor Relations

Tim Cook – Chief Executive Officer

Luca Maestri – CFO

Conference Discussion Participants

Shannon Cross – Cross Research

Samik Chatterjee – JPMorgan

Katy Huberty – Morgan Stanley

Jim Suva – Citi

Wamsi Mohan – Bank of America Merrill Lynch [19659004] Mike Olson – Piper Jaffray

Louis Miscioscia – Daiwa Capital Markets


Good day and welcome to Apple Incorporated Second Quarter Fiscal Year 2019 World Conference. Today's call is registered.

At this time, to open comments and introductions, I will call Nancy Paxton, Senior Director of Investor Relations. Please continue.

Nancy Paxton

Thank you. Good afternoon, and thanks to everyone for joining us today. Speech first is Apple's CEO, Tim Cook; and he will be succeeded by CFO, Luca Maestri. After that, we open the call to questions from analysts.

Please note that some of the information you want to hear during our discussion today will consist of forward-looking statements, including without limitation those relating to revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation and future business prospects. Actual results or trends may differ materially from our forecast.

For more information, see Risk Factors discussed in Apple's recently submitted periodic reports on Form 10-K and Form 10-Q, and Form 8-K filed with SEC today, along with related press release. Apple assumes no obligation to update any forward-looking statements or information that speaks for their respective dates.

I will now turn the call to Tim for initial comments.

Tim Cook

Thanks, Nancy. Good afternoon and thanks to all of you for joining us today. This has been an exciting and productive quarter for Apple. In my letter to investors at the beginning of January I wrote that one of Apple's great strengths is our culture of flexibility, adaptability and creativity. This quarter featured some important announcements that speak to the power of our innovation and long-term thinking. I'd like to start with some top line highlights and then move into greater detail with you.

I get started with financial results. Our revenue was $ 58 billion against the high end of our guidance area. We see this result as a positive result in light of ongoing fluctuations from weaker foreign currency versus US dollars. In constant currency, our annual turnover would have been 200 basis points better than our reported results indicate.

We had good results in a number of areas throughout our business. It was our best quarter ever for $ 11.5 billion in revenue. We had a blockbuster quarter for the iPad with revenue up 22% from a year ago. This is our highest iPad revenue growth of six years. And it was another sensational quarter for Wearables with growth close to 50%. This business is now about the size of a Fortune 200 company, an amazing statistic when considering that it has only been four years since we delivered the very first Apple Watch. I'm talking more about these categories later.

While we were growing this year in developed markets, and while we had a record in March, resulted in a number of major markets, including the US, Canada, the UK and Japan, we experienced a decline in emerging market revenue. But we feel positive about our path. Our annual sales performance in Greater China improved compared to the December quarter, and we have seen a very positive customer response to the pricing actions we have taken in that market, our procurement and financing programs in our stores, the impact of government initiatives to stimulate the economy and improved trading dialogue between the US and China.

Our App Store results still reflect the impact of the decline in regulatory approval in gaming apps in China, but we are encouraged by the recent increase in approval rates. We strongly believe in our long-term opportunity in China, thanks to our robust ecosystem, our talented development community, and its growing population of technologically savvy consumers who value the very best products and services. For the iPhone, while worldwide revenues were down 17% from a year ago, it fell significantly in the last few weeks in the March quarter.

Looking back on the last five months November and December were the most challenging, so this is an encouraging trend. We like the direction we have with the iPhone, and our goal is now to pick up the pace. Importantly, our active installed base of units continues to grow in each of our geographic segments and set new full-time posts for all major product categories. The growing installed base is a reflection of customer satisfaction and loyalty, and drives our Service business to new heights.

In fact, we had our best quarter for the App Store, the Apple Music slides and the App Store our search ad business, and we added new quarterly revenue for AppleCare and Apple Pay. The Apple Pay transaction volume more than doubled the following year, and we are on track to reach 10 billion transactions in the calendar year. Apple Pay is now available in 30 markets, and we expect to be in 40 markets by the end of the year. More and more transaction systems accept Apple Pay and New York's MTA system will begin their rollout early in the summer.

As we've seen in places like London, Tokyo, and Shanghai, contactless access to transit systems helps boost Apple's Apple adoption, and we believe this will bring even more people using Apple Pay in the US. And Ticketmaster has just announced that they will accept Apple Pay for online ticket purchases and through Ticketmaster app, and over 50 of their entertainment and sports events are launching non-contact tickets this year, including the vast majority of NFL stadiums.

Subscription is a powerful driver for our Services business. We reached a new high of over 390 million paid subscriptions at the end of March, an increase of 30 million in the last quarter alone. This was also an incredibly important quarter for our services going forward. In March, we previewed a game-changing selection of new services, each one cluttering on principles that are basic to Apple. They are easy to use. They have unparalleled attention to detail. They place a premium on the user's privacy and security. They are professionally cured personally and ready to be shared by everyone in your family.

These features are not only pleasant to have. They actually help eliminate the boundary between hardware, software and service, and create an exceptional exceptional experience for our users. First, we launched Apple News +, building on the great moment in Apple News, which is already the number one news app in the US and the UK. It will bring together more than 30 popular magazines, leading newspapers, and digital publishers into a beautiful, convenient and cured Apple News app experience.

Apple News + builds on our commitment to supporting quality journalism from trusted sources while providing the best magazine and news reader experience ever for mobile devices. Improving our vision of replacing the wallet, we announced that the Apple card was based on principles. Apple stands for openness, simplicity and privacy. Integrated with the Wallet app, Apple Card delivers all new experiences that only Apple can offer to integrate hardware, software, and services into an elegant solution that puts the customer in the center. It's the first card that encourages you to pay less interest, eliminate fees and give you daily cash on all your purchases, and customer interest to date has been very good.

We also previewed Apple Arcade's world's first mobile game subscription service stationary in the living room. With over 100 new games, all with no ads or ad tracking, no additional purchases and respect for user privacy, we have created a service for players of all ages, children of adolescents, and one that families can enjoy together. The App Store is already the world's largest gaming platform, and we believe Apple Arcade is a great way to free up the development of the game developer community with a collection of new games not available on any other mobile platform or any other subscription service. We cannot wait for our customers to experience it for themselves from the beginning of autumn.

We were thrilled to have a look at what's new for TV. Beginning in mid-May, the all-new Apple TV app will unite the different ways of discovering and watching shows, movies, sports news and more in an app across the iPhone, iPad, Apple TV, Mac, smart TVs and streaming devices. And users can subscribe to and watch new Apple TV channels like HBO Showtime and Starz, and pay only for services that they want on demand on and offline. And this fall, Apple TV + will be the new home of the world's most creative storytellers with exclusive original shows, movies and documentaries.

We also had several large product introductions in the quarter. We launched a new, more powerful iMac with dramatic increases in both computing and graphics performance, making it a great update for consumers and pros. For our Mac business overall, we met some processor limitations in the March quarter, which led to a 5% decline compared to last year. But we believe our Mac revenues would have been up against last year without these limitations, and do not believe this challenge will have a major impact on our Q3 results.

For the iPad, we were very pleased to return to the growth of Great China while generating strong double-digit growth in each of our other geographic segments. Our good iPad results were driven primarily by a strong customer response to the iPad Pro. Late in the quarter, we launched a brand new iPad Air with an ultra-thin design, Apple Pencil support and high-end performance powered by Apple's A12 Bionic chip.

In addition, we introduced a new iPad mini, a major upgrade to iPad fans who love an ultra-portable design and like the new iPad Air, it delivers the power of the A12 Bionic and Apple Pencil support. Last month we presented new AirPods, the second generation of the world's most popular wireless headphones and the demand has been incredible. This is no less than a cultural phenomenon.

With the new Apple-designed H1 chip, the new AirPods deliver faster connectivity times, more talk time and the convenience of hands-free Hey Siri. Our stores and online stores continue to be a key point of innovation. As we mentioned in January, we've been working on an initiative to make it easy to trade in a phone call in our store, fund the purchase over time and get help transferring data from the old phone to the new phone.

As part of this initiative, we have rolled out new procurement and financing programs in the US, China, UK, Spain, Italy and Australia. The results had been striking. Throughout our stores we had a record start on our introduction programs and with more than 4 times the volume of the volume for the March quarter a year ago.

With every quarter of a year, we are more inspired by the impact our products have on people's health and fitness. This quarter, we took the ECG app on Apple Watch Series 4 to Hong Kong and 19 European countries, including France, Germany, Italy, Spain and the UK

Just as the ECG app launches in the United States, there is hardly a day That goes by that I didn't get a letter or email from a customer in one of those countries talking about how this feature had significantly changed their lives. We believe that we really just begin to get hold of what we can do to help users actively deal with their health and well-being.

For example, last month Stanford Medicine reported results of the Apple Heart Study, the largest ever study of its kind, which recorded over 400,000 participants from all 50 countries over a period of just eight months. And hundreds of institutions now support health records on the iPhone with recent additions, including Michigan Medicine and UT Health Austin.

In February, we announced that we are working with the US Department of Veterans Affairs to create health records on iPhone available to veterans. This will be the first platform platform of its kind available to VA, the largest medical system in the United States, offering services to more than nine million veterans in more than 1200 facilities.

Apple's innovation goes beyond the impact we have in the lives of our customers to the impact we leave on the world around us. We recently marked Earth Day with several major announcements of our efforts to leave the world better than we found it. We have completed the award of our $ 2.5 billion green bond deserving over 40 environmental initiatives worldwide for projects ranging from solar power generation to water conservation, to the development of custom alloys for our products made from 100% recycled aluminum.

We have announced a huge expansion of our recycling programs, including quadruple the number of sites, where US customers can send their iPhones to be disassembled by Daisy, our recycling robot. Each Daisy can now disassemble 1.2 million units per year so recycled material can be recycled in the manufacturing process. And we collaborated with a record number of our suppliers to follow our management and transition to 100% pure energy. With the help of these 44 suppliers, we will exceed our goal of bringing four gigawatts of renewable energy into our supply chain by 2020 with over one extra gigawatt projected within this time frame.

In the last calendar year, only those partners who have joined this effort have generated enough clean energy to operate over 600,000 homes in the United States. We are very proud of the progress we and our partners make, and hope that our actions will inspire other companies to do what they can to protect the world we share.

We're as busy as ever about our large hardware, software and services pipeline, and we're looking forward to sharing more information about the future of our four software platforms at our Worldwide Developer Conference now less than five weeks from now. Everyone here is hard at work to prepare for the WWDC, and it is always a privilege to share the future of our platforms with the community of world-renowned developers who bring it to life. You're not going to miss this.

We are in the fortunate position of generating more money than we need to run our business and invest safely in our future, so today we announce the latest update to our ROI, including an increase in our repurchase authorization and our quarterly dividend .

For more information on this and our quarterly results, I call Luca.

Luca Maestri ]

Thanks, Tim. Good afternoon all together. Revenue in the March quarter was $ 58 billion near the high end of the guidance area that we gave 90 days ago and down 5% from last year. The revenue fall reflects 200 basis points of negative currency, due to the strength of the US dollar. Overall, product revenues reached 9%, mainly driven by the iPhone, while service revenue increased by 16% to a new all-time record.

We also entered a new quarterly quarterly for Wearables Home and Accessories, and we recorded our best iPad growth rate in six years. The company's gross margin was 37.6% in line with our guidance. The gross margin of the products was 31.2% lower than 310 base points in order due to the seasonal loss of influence and foreign currency heads.

Services gross margin was 63.8%, up 100 basis points in order due to another mix and influence of higher income. Net income was $ 11.6 billion. Diluted earnings per share were $ 2.46, and operating cash flow was $ 11.2 billion.

Let me give more color to our various income categories. iPhone revenue was $ 31.1 billion. We see positive customer responses to the latest pricing actions in some emerging markets, as well as improvements to our procurement and financing programs. And our annual performance improved compared to our quarterly results in Great China, America and Japan.

Our active installed base of iPhone reached a new full-time high at the end of March. This growing installed base reflects the industry's leading customer satisfaction and loyalty. The latest survey of US consumers from 451 Research indicates 99% customer satisfaction combined with the iPhone XR, XS and XS Max. And among business buyers, who plan to buy smartphones in the June quarter, 81% are planning to buy iPhones.

Turn on services. As Tim said, it was our best quarter ever with $ 11.5 billion in revenue, an increase of 16% from last year. We generated double-digit revenue growth on the App Store, Apple Music, shooting services, AppleCare, Apple Pay and our App Store advertising business. And we set income records on full-time jobs in four of our five geographical segments. We are very pleased with this performance. As you can see from our new information, Services accounted for 20% of the revenue from the March quarter and about one-third of our gross profits.

Customer engagement in our ecosystem continues to grow. The number of transaction accounts on our digital content stores reached another new full-time high in the quarter with the number of paid accounts, and also posted a new all-time record and grew with strong double digits last year. And we now have over 390 million paid subscriptions across our service portfolio, an increase of $ 120 million compared to just 12 months ago. All subscription categories grow strongly double-digit, and as we mentioned for the quarter, we expect the number of subscriptions paid to exceed $ 0.5 billion by 2020.

At the App Store, the subscription business is highly diversified and growing strongly around the world. In fact, the number of paid third-party subscriptions increased by over 40% compared to last year in each of our geographical segments. And across all third-party subscription apps, the largest was only 0.3% of our total revenue in services.

Next, I'll talk about Mac. Revenue was $ 5.5 billion compared to $ 5.8 billion a year ago, with the decline driven mainly by processor limitation on some popular models. Despite this challenge, we generated two-digit Mac revenue growth in Japan and Korea, which introduced new all-time Mac revenue records in both markets. Worldwide, almost half of the Mac purchasers reached the Mac during the quarter, and the Macer actively installed base reached a new full-time high.

We had good results for the iPad with $ 4.9 billion in revenue and growth accelerating from December to 22%. iPad revenue grew in all five of our geographic segments, with a decline in growth in China and strong double-digit growth in all other segments. We had our best marsh night ever for the iPad in Japan, and we were particularly pleased with the results in Korea, Thailand and Mexico, where sales more than doubled last year.

In total, over half of the customers bought iPads during the March quarter was new for iPad and iPad actively installed base also achieved a new full-time height.

The iPad growth in purchases is primarily driven by the great customer response to our new iPad Pros. These fully-customized full-screen iPads Liquid Retina display, Face ID, powerful A12X Bionic chip with Neural Engine and support for the new Apple Pencil and Smart Keyboard, make the iPad Pro the perfect PC laptop replacement for both consumers and professionals .

The latest research from 451 research measured a 93% customer satisfaction rating for the iPad in general. Among customers planning to buy tablets, 77% of consumers and 75% of companies plan to buy iPads.

Revenue from home and accessories posted a new revenue record of $ 5.1 billion in March, mainly due to the strong development of our Wearables business, which grew nearly 50%. Within this category, Apple Watch is the best-selling and most beloved smartwatch in the world, producing its best ever result for a non-holiday neighborhood. It comes to many new customers with three quarters of purchases to customers who have never owned Apple Watch before. The interest in AirPods has been out of the charts, and we are working hard to get the incredible customer demand.

Turns on our stores and online stores. We generated very strong double-digit sales growth from Apple Watch and iPad. We also announced 50 new Today at Apple sessions in the quarter in three new and expanded formats Skills, Walks and Labs for free at our stores around the world. We are making important advances in the corporate market, and helping to change big industries. We build on Apple's leading position in key functional areas to expand our reach and share in large accounts.

Aviation is a strong example of this strategy at work. In over 450 airlines, iPad is overwhelmingly the preferred solution for pilots' electronic air bag. We have made good progress and expanded Apple's footprint across the cockpit into the cabin, where more than half of the 50 largest airlines have now implemented iOS to enhance the guest experience, and enable a new mobile sales point of use.

We also see traction with other mission-critical flight functions in basic operations and flight maintenance. For example, one of the largest airlines in the world says that the adoption of the iPad has cut maintenance delays in half. Apple services are also aboard, including the increased adoption of Apple Pay for food and beverage purchases and access to Apple Music flights.

We also see significant iOS traction with large corporate platforms facing complex back-end systems for tens of millions of employees worldwide. The end-user user experience is crucial for engagement and productivity and with increasing mobility in today's modern workforce. These experiences are best on native iOS applications.

We are seeing great speed through the growing number of iOS SDKs delivered by the world's largest business platforms. For example, SAP's SDK for iOS continues to gain strong traction with its customers and grows by over 40% over the past six months. And in the last quarter, Salesforce has released the SDK that allows developers to build original iOS applications directly on the Salesforce platform.

And finally, our corporate channels continue to gain momentum. In February, our Apple at Work initiative was launched with AT&T. This expansion of our ongoing partnership with AT&T will make it easier for more customers to choose the best Apple products for their business needs and modernize their business. AT&T will enable Apple products business services to help businesses with their IT strategy, including device management, security, productivity, and collaboration.

Let me now go to our cash position. We ended the quarter with $ 225 billion in cash, plus traded securities. We also had $ 101 billion in thermal debt and $ 12 billion in commercial paper outstanding, for a net cash position of nearly $ 113 billion.

As a result, we are in a very strong position which allows us to invest safely in all areas of the Business, while continuing to return value to our shareholders. Last year alone, we announced a commitment to contribute more than $ 350 billion to the US economy over the next five years, including the creation of 20,000 jobs.

More recently, we have announced a major expansion in Austin Texas and other cities across the country. All of these efforts are important investments to ensure that we incorporate innovative ideas and top talent where they come.

When we do these initiatives, we can also return over $ 27 billion to investors during the March quarter. We launched a $ 12 billion share purchase program in February, resulting in initial delivery and retirement of 55.1 million shares. We also bought back 71.7 million Apple shares for $ 12 billion through open market transactions, and we paid $ 3.4 billion in dividends and equivalents.

Our cash priorities have not changed over the years. Most importantly, we will always preserve the cash we need to run our business, maintain strategic flexibility, and invest in our future. We are well on our way to meeting the investment projections we presented early last year. We also want to work for a more optimal capital structure, and as we said before, it is our plan to reach a net cash neutral position over time.

Given our confidence in Apple's future and the value we see in our stock, our Board has approved an additional $ 75 billion for share buybacks. And because we know many of our investors' revenue, we also increase quarterly dividends for the seventh time in less than seven years to $ 0.77, an increase of about 5% from the previous amount.

We paid over $ 14 billion in dividends and equivalents over the last four quarters alone, making us one of the biggest dividend payouts in the world. In the future, we continue to plan annual increases in dividends per share.

As we move forward into the June quarter, I would like to consider our perspective, which includes types of forward-looking information that Nancy referred to the beginning of the conversation. We expect revenues to be between $ 52.5 billion and $ 54.5 billion. This guidance area comprises 300 basis points of negative exchange rate impact the following year. Also, as a reminder, in the June quarter of last year, our services revenue included a beneficial $ 236 million one-off item in connection with the final dissolution of various litigation cases.

We expect the gross margin to be between 37% and 38%. We expect OpEx to be between $ 8.7 billion and $ 8.8 billion. We expect OI & E to be about $ 250 million, and we expect the tax rate to be around 16.5%. In addition, the approved increase reflects, the board today stated a cash dividend of $ 0.77 per share share price, paid on May 16, 2019 to shareholders in record as of May 15, 2019.

With that I would like to open the call to questions.

Nancy Paxton

Thank you, Luca. And we ask you to limit yourself to two questions. Operator, can we have the first question?

Questions & Answers Session


Surely. Our first question comes from Shannon Cross with Cross Research.

Shannon Cross

Many thanks for taking my question. Tim, can you talk a little more about what you see in China? It seems clear that things are improving in sequence. You also mentioned that the last few weeks of the quarter were stabilizing in emerging markets, I think. So what do customers say? What are your partners who say in China? And then I have a follow-up.

Tim Cook

Yes. Thanks for the question, Shannon. We see – in the iPhone room, we experienced better year-over-year performance in recent weeks in the quarter compared to the whole quarter or November and December, which was kind of a – it seems to be trough. I think there is a basis for this.

One, we have made some price adjustments, which mainly support the weaker currency effect and then some. There are stimulus programs that the government has done, including – and this happened in early April, while VAT is reduced from 16% to 13%. So they have been aggressive on the stimulus side.

Three, our dedication and funding programs that we have implemented in our stores have been very well received there, and I am pleased with the results so far there. And then four, there is an improved trade dialogue between the United States and China. And from our point of view, this has affected consumer confidence on the ground there in a positive way. And then, I think it's a set of all these things, and we feel much better than we did 90 days ago.

Shannon Cross

Great. Thank you. And then I'm sure you probably expect a question about Qualcomm settlement. So what do you want to say about this settlement? How do you think about your component suppliers in the future? And how do we think about this with regard to – I do not know your development plans in the future? Because I'm sure you're not going to talk about doing 5G, but it's clear. Thanks.

Tim Cook

Yes. Thanks, Shannon. We are happy to bring the trial behind us, and all trials around the world have been rejected and settled. We are very pleased to have a multi-year delivery agreement. And we are pleased that we have a direct license agreement with Qualcomm, which I know is important to both companies, and so we feel good about the solution.

Nancy Paxton

Thanks, Shannon. Can we get the next question, please?


The next question comes from Samik Chatterjee with JPMorgan.

Samik Chatterjee

Hello. Takk for at du tok spørsmålet. Tim, du snakket om Kina responderer godt på disse prissettingsaksjonene du har tatt i det markedet. Har noen av disse læringene gjennomført hvordan du bestemmer priser i de gjenværende vekstmarkedene, som India og så videre når du er klar for neste produktsyklus?

Tim Cook

Vi har gjort noen tilpasninger i India, og vi ' Jeg har foreløpig sett noen bedre resultater der. Alt vi gjør, anbefaler oss alt vi gjør i fremtiden, så vi prøver å lære det beste vi kan og brette det inn i vår tenkning. Og det vil vi selvfølgelig gjøre med dette også.

Samik Chatterjee

Takk. Jeg hadde nettopp en rask oppfølging av Luca på Servicesiden. Luca, vi ser at du leder til høyere driftskostnader kvart i kvart. Hvor mye av det inkrementelle går inn i, støtter de nye tjenestene du planlegger å lansere senere på året?

Luca Maestri

Ja. Selvfølgelig støtter vi både våre produkter og tjenester, og du kan se Trajectory of our OpEx over de ulike kvartalene. Klart når vi legger til nye tjenester, må vi gjøre de nødvendige investeringene for å støtte dem.

Vårt tjenestevirksomhet er – har flere strømmer. Samlet er det en følge av selskapets brutto marginer. Du har sett det siste – vi kjører tjenestermarginer på over 60%. Så det er en svært viktig virksomhet for oss på mange måter for vårt økosystem og for vår evne til å tjene penger på det. Og så klart vil vi gjøre alle nødvendige investeringer for å sikre at de nye tjenestene lykkes. Og vi er virkelig oppmuntret av nivået på kundesvar som vi mottok så langt i påvente av lanseringen av disse tjenestene.

Nancy Paxton

Takk Samik. Vi har neste spørsmål, vennligst.


Det neste spørsmålet kommer fra Katy Huberty med Morgan Stanley.

Katy Huberty

Takk. Luca hvis jeg ser tilbake i løpet av de siste fem årene, synker omsetningen i juni kvartal vanligvis om lag 15% fra marskvartalet. Du leder til en nedgang på 8% i år. Så kan du bare snakke om hvilke regioner eller produktsegmenter du tror kan overgå den typiske sesongmessigheten?

Luca Maestri

Ja, Katy. And keep in mind by the way we are reporting this guidance including a 300 basis point negative impact from foreign exchange, so actually in constant currency the numbers would be even stronger.

At the product category level we expect that we continue to have strong revenue growth from the non-iPhone categories as we've had for the first half of our fiscal year. We're also expecting a relative improvement in our iPhone performance on a year-over-year basis in Q3 versus the first half.

As Tim said March was the strongest month of the quarter on a year-over-year basis and so this has given the confidence to provide the guidance that you've seen. Geographically, of course, as you've seen from our results for the March quarter, China is the geo where we found some challenges, but we believe the trajectory should improve over time.

Katy Huberty

Thank you. And then just as a follow-up, Shannon said you're not going to talk specifics around the timing of the 5G phone, but Tim maybe you can talk about how the company approaches a new technology like this given the higher cost but also potentially significant benefit, how you think about the right timing for coming to market with a product, with those characteristics? And then just generally how meaningful you think 5G is as a demand driver for upgrades in your iPhone installed base? Thank you.

Tim Cook

Katy, this is one that I'm going to largely punt on as you would probably guess. We look at a lot of things on the different technologies and try to look at the — and select the right time that things come together and get those into products as soon as we can. And the — certainly from a cost point of view there has been — the technologies have had cost pressure over the last couple of years or so.

On the flip side of that there's a number of things in the commodity markets going in the other direction at the moment like DRAM and NAND. And so it's difficult to project what happens next, but it's the aggregate of all of it that really matters from a price point of view.

Nancy Paxton

Thank you, Katy. So we have the next question, please.


Jim Suva from Citi has our next question.

Jim Suva

Thank you very much. A topic that's probably split or shared by both Tim and Luca on a response, but I'll ask the question and you can decide how to divide it up.

In your opening remarks, Tim, you'd mentioned about pricing adjustments that you made in some of the markets and then Luca talked also about the strength of the trade-in program or maybe it was Tim also. Can you help us understand about what type of lessons or elasticity you've learned about pricing and the trade-in programs of how it impacts like revenues and COGS and margins and things? Thank you.

Tim Cook

Yeah. Jim, in the opening remarks I was really talking about China specifically. And I mentioned four things that I believe are responsible for the better year-over-year performance in the Q2 relative to Q1 and also the final weeks of March being better than the Q2 average. And those four are the price reductions, but that's one of them. But there are three others and one of the others is the trade-in and financing programs that we instituted in our retail stores.

Clearly, what we've learned here and it's not a surprise really is that the — many, many people do want to trade-in their current phone. It does — from a customer user point of view the trade-in looks like a subsidy, and so it is a way to offset the device cost itself. And many people in literally every market that we've tried this in, there is a reasonable number of people that want to take and pay for something on installments instead of all at once. And so, it's a little different in each market in terms of what the elasticity is, but you can bet that we're learning quickly on all of those.

The other two items that are not insignificant in China that I don't want to lose here is that the stimulus programs, I believe, are having an effect on the consumer. And the one that I got much visibility in — that happened in early April was the VAT reduction from 16% to 13%, so it's a very aggressive move. But there are other stimulus programs as well that likely have an effect to the consumer level.

And then finally — and this is not to be under weighted either — I think the improved trade dialogue between the countries affects consumer confidence in a positive way. And so, I think it's sort of the sum of all of those things.

Luca Maestri

And Jim, if I may add on the gross margin level as we look at pricing actions, of course, anytime you do a pricing action it is gross margin percentage diluted. But what really matters to us and what we look at — when we look at the elasticity of these programs is to see the impact on our gross margin dollars. And what — the experience that we've had in a few of these emerging markets has been positive in that respect and so that's what we think matters the most really.

Jim Suva

Thank you so much, gentlemen.

Nancy Paxton

Thank you, Jim. We have the next question, please.


The next question will come from Wamsi Mohan with Bank of America Merrill Lynch.

Wamsi Mohan

Hi. Yes. Thank you. Tim, you shared a lot of color around trade-ins, but I was also hoping maybe you can characterize what sort of dynamics you're seeing across your installed base on these trade-ins. Hvilken type enheter blir handlet i? Is the profile of someone who has a really old iPhone? Or are you seeing folks that have newer iPhones trading in? And what sort of incentives are you providing beyond sort of the financing to drive that? And do you see this as something that can accelerate replacement cycles here over the next year or so? And I have a follow-up.

Tim Cook

We're — actually the product that's being traded in is all over the place, to be honest. It's 6, 6 Plus, 6S, 6S Plus, 7, 7 Plus and then fewer 8 and 8 Plus. But there's some of each of those and so you get customers that are on the two-year cycle and customers — some customers on the one-year cycle and then customers as well on the three and four-year cycles. And so it's really all over the place.

In terms of the incentives we're offering currently in our retail stores a trade-in value that has — that is more than the sort of the blue book of the device if you will for lack of a better description. And so we have topped those up to provide an extra benefit to the user.

The installments are different in each geography. Jeg vil si at for øyeblikket er geografien som gjør det beste i avdrag, Kina. And we have a bit of a unique offering there I think versus the — versus what you can get in the regular market and so that probably further helps there. And so you can bet that we're learning on each of these finding the parts that the user likes the most.

I think the key is we're trying to build a — build something into the consumer mindset that it's good for the environment and good for them to trade in their current device on a new device. And we do our best of getting the current device to someone else that can use that or in some cases if the product is at an end of life we are recycling the parts on it to make sure that it can carry on in another form.

Wamsi Mohan

Thanks for the color Tim. And as my follow-up Luca can you just clarify if the settlement with Qualcomm is creating either a headwind or a tailwind to your gross margins in the near-term? And does your guidance contemplate incremental pricing actions that could be creating some gross margin headwinds? Thank you.

Luca Maestri

As Tim has explained we've reach this comprehensive agreement with Qualcomm. As part of this we have agreed that we're not going to share the financial terms of the agreement, so we plan to honor that. What you see in our gross margin guidance for the June quarter we guided 37% to 38% fully comprehends the outcome of the agreement with Qualcomm.

Nancy Paxton

Thank you, Wamsi. Could we have the next question please?


Mike Olson from Piper Jaffray has our next question.

Mike Olson

Thanks for taking my question. So, you have more than 1.4 billion active devices and at your event you announced services that leverage that installed base. And you have obviously a remarkable position with kind of this Trojan horse of devices out in so many households.

So, I guess, the question is and I know some of these services aren't even live yet but should we expect a continuation of the building out of new services categories like what we saw at the March event? Is there a pipeline of new services in the works? Or have we kind of seen what we're likely to see on that front for the near to intermediate term? And then I have a follow-up.

Tim Cook

Yes, I wouldn't want to get into announcing things on the call, but obviously, we're always working on new things. And — but we're right now we're really focused on getting these four out there. We have the News+ in the market today. We'll have the Apple Arcade and the Apple TV+ products in the market in the fall and Apple Card will go out in the summer timeframe. And so we've got lots in front of us and we're very excited about getting these out there.

Mike Olson

Right. And then you mentioned the App Store search ad business a couple of times in the prepared remarks. Is that reaching a point where it's become material and maybe moving the needle for overall services revenue? Or is there anything you can quantify related to that? I also imagine that this is a high-margin business at least maybe higher than the overall Services margin but wondering if you can confirm if that's the case or not. Thanks.

Tim Cook

It's growing very, very fast Mike. I think it was up around 70% over the previous year. We're expanding into new geographies as well and we still have more geographies out there that we think can move the dial further. So, it is a — it's definitely a business that is big and getting bigger.

A – Nancy Paxton

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


Our next question comes from Louis Miscioscia with Daiwa Capital Markets.

Q – Louis Miscioscia

Okay and thank you for taking my question. Tim, when you look at the four things that you have announced. And I realize they have different dates when they're coming out but, which ones would you say over the next 12 months has the most potential to help your Services line? And then maybe, which one has the best long-term potential? And then, I have a quick follow-up.

A – Tim Cook

We're going to wait until we get these things out. And what I can tell you right now is that the — we're taking sort of consumer interest on the Apple Card and there's been a significant level of interest on that and we're excited. As you know the — gaming is the top category on the App Store.

And so the Apple Arcade will serve some of that market. And it serves it with a different kind of game, which we think will be great for developers and great for users. The TV+ product plays in a market where it's — there's a huge move from the cable bundle to over the top.

We think that most users are going to get multiple over-the-top products. And we're going to do our best to convince them that the Apple TV+ product should be one of them.

And then, we're working very hard to get everyone to give Apple News+ a look. Because we think it's a very unique product. And I love magazines. And we have really wanted to support the publishers.

And so, we're working very hard to — at the — but at the very beginning of the ramp there. We wouldn't do a service…

Q – Louis Miscioscia

Okay, great.

A – Tim Cook

…that we didn't think could be meaningful. So that's sort of the way I look at it.

Q – Louis Miscioscia


A – Tim Cook

Yeah, these aren't hobbies.

Q – Louis Miscioscia

Okay. A quick follow-up on India, obviously market share there is well below China. I believe you're looking to start manufacturing there. But what's the — obviously the potential could be huge but the market already seems to be pretty dominated on the Android side, so maybe if you could just talk about trying to really aggressively ramp up share there. Thank you.

A – Tim Cook

I think India is a very important market in the long-term. It's a challenging market in the short-term. But we're learning a lot. We have started manufacturing there which is very important to be able to serve the market in a reasonable way. And we're growing that capability there.

And we would like to place retail stores there. And we're working with the government to seek approval to do that. And so, we plan on going in there with sort of all of our might.

We've opened a developer, accelerator there, which we're very happy with some of the things coming out of there. It's a long-term play. It's not something that's going to be on overnight huge business. But I think the growth potential is phenomenal.

It doesn't bother me that it's primarily Android business at the moment because that just means there's a lot of opportunity there.

Nancy Paxton

Thank you, Lou. 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. And the numbers to the telephone replay are 888-203-1112 or 719-457-0820.

Please enter confirmation code 7060604. And these replays will be available by approximately 5:00 PM Pacific Time today.

Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. And financial analysts can contact Matt Blake or me with additional questions. Matt is at 408-974-7406, and I'm at 408-974-5420. And thanks again for joining us.


That does conclude our conference for today. Thank you for your participation.

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