Apple Inc. (NASDAQ:AAPL) Q2 2023 Earnings Call Transcript

Apple Inc. (NASDAQ:AAPL) Q2 2023 Earnings Call Transcript May 4, 2023

Operator: Good day, and welcome to the Apple’s Q2 Fiscal Year 2023 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 Suhasini Chandramouli, Director of Investor Relations. Please go ahead.

Suhasini Chandramouli : Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple’s CEO, Tim Cook; and he’ll be followed by CFO, Luca Maestri. After that, we’ll open the call to questions from analysts. Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expense, other income and expense, taxes, capital allocation, and future business outlook, including the potential impact of macroeconomic conditions on the company’s business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast.

For more information, please refer to the risk factors discussed in Apple’s most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I’d now like to turn the call over to Tim for introductory remarks.

Tim Cook: Thank you, Suhasini. Good afternoon, everyone, and thanks for joining us. Today, we’re reporting revenue of $94.8 billion for the March quarter, which was better than our expectations. We set an all-time record for Services and a March quarter record for iPhone. We were particularly pleased with the performance we saw in emerging markets and achieved all-time records in Mexico, Indonesia, the Philippines, Saudi Arabia, Turkey and the UAE, as well as a number of March quarter records, including in Brazil, Malaysia and India. This result is a testament, first and foremost to our teams around the world who are engaged every day in the work of bringing new innovations to life. It speaks to the incredible power of Apple products and services to enrich people’s lives in indispensable ways.

And whether it’s in the design lab in Cupertino, or in one of the brand new retail stores in India, I am constantly inspired by the way our people come together to make a real difference in the world. During the March quarter, we continued to face foreign exchange headwinds, which had an impact of more than 500 basis points, as well as ongoing challenges related to the macroeconomic environment. Revenue was down 3% year-over-year as a result, while on a constant currency basis, we grew in total and in the vast majority of the markets we tried. Despite these challenges, we continue to manage for the long term and to push the limits of what’s possible, always on behalf of the customers who depend on our products whether it’s students exploring new frontiers, developers dreaming up their next big idea, or artists taking their creativity to a whole new level.

Let me share how these results showed up across our lineup of products and services. Let’s start with iPhone, which set a new March quarter record with revenue of $51.3 billion. The iPhone 14 and 14 plus continue to delight users with their long lasting battery and advanced camera. And our pro users continue to rave about the most powerful camera system ever in an iPhone. This March, we were excited to expand emergency SOS via satellite to six new countries, bringing this important safety feature to even more users. We now offer this vital service in 12 countries, and I’m grateful for every note I’ve received from around the world about the life saving impact of our safety features. Now let’s turn to Mac, which recorded $7.2 billion in revenue for the March quarter in line with our expectations.

As we noted during our last call, Mac faced a very difficult compare because of the incredibly successful rollout of our M1 chip throughout the Mac lineup last year. And like our other product lines, Mac is facing some macroeconomic and foreign exchange headwinds as well. That said, the advancements we’ve made in power efficient performance continue to amaze our users. Our M2 Mac Mini customers are raving about the pro level powerhouse packed into an ultra-compact design, and users are marveling at the power and speed at the heart of every M2 powered MacBook Air and MacBook Pro, which allowed them to sustain even the most demanding workloads. iPad revenue was $6.7 billion, which was also in line with our expectations. Similar to Mac, iPad revenue performance was impacted by macroeconomic challenges, foreign exchange headwinds, and a difficult compare with last year when we launched the M1 powered iPad Air.

iPad’s versatility continues to be its greatest strength as we’re helping students learn on the same family of devices artists use to create their next masterpiece. Across wearables, home and accessories, revenue was $8.8 billion. With its exceptional range of game changing health and safety features, Apple Watch becomes more and more indispensable every day. Apple Watch Ultra is attracting adventures, athletes and everyday users with its breakthrough features built for endurance and exploration. And with summer travel season soon heating up, there’s no better companion in the air or on the road than AirPods, the best and most popular headphones in the world. Meanwhile, Services set an all-time record with $20.9 billion in revenue for the March quarter.

We achieved all time revenue records across App Store, Apple Music, iCloud and payment services. And now, with more than 975 million paid subscriptions, we’re reaching even more people with our lineup of services. Apple TV Plus continues to draw praise from customers and reviewers alike. During the past quarter, fans tuned in to incredible new series like Shrinking and The Big Door Prize and got to welcome Ted Lasso back into their homes for a third season. Movies like Tetris are captivating viewers with many more to come, including Martin Scorsese’s Killers of the Flower Moon later this year. Three years since its launch, Apple TV Plus programming has been celebrated across the globe, with over 1,450 nominations and more than 350 wins. Recently, we were thrilled to cheer on The Boy, the Mole, the Fox and the Horse, which won an Academy Award for best Animated Short Film.

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The first season of our historic tenure partnership with Major League Soccer is well underway with MLS season pass, we’ve created the ultimate destination for soccer fans, offering subscribers the ability to watch every match with no blackouts. And with baseball season in full swing, Apple TV Plus subscribers can watch their favorite teams with the return of Friday night baseball. This quarter, we launched Apple Music Classical, a standalone app that gives something special to classical music lovers. Apple Music Classical packs the largest library of classical music on Earth into a thoughtful and intuitive design that strikes all the right notes. Whether you’re listening with AirPods or HomePod, the premium sound experience of Apple Music Classical will leave you with a feeling of being front row at the symphony just behind the conductor.

In March, we also launched Apple Pay Later designed with users privacy and financial health in mind. Apple Pay Later allows users to split purchases into multiple payments with no interest or fees. And last month, we introduced Apple Card Savings Accounts to give users even more value out of their daily cash Apple Card Benefit. At Apple, our customers are at the center of everything we do. Nowhere is that more evident than retail, where our teams are dedicated to sharing the best of Apple with our customers. And we’re constantly innovating to deliver exceptional experiences and meet our customers where they are. In the US, we launch Shop with a specialist over video, a new way for customers to learn about iPhone and find the one that’s just right for them.

And as I noted earlier, in a milestone for Apple, we just opened our first two Apple stores in India, in Mumbai and Delhi. I was there to see it for myself, and I couldn’t have been more delighted by the excitement and enthusiasm of the customers, developers, creators and team members I got to spend time with. I’ve had the chance to connect with customers and teams all around the world in recent months, so many people shared with me that they were fans of Apple, not just because of the innovations we create, but because of the values that guide us, and that means a great deal to us. We’re constantly striving to make a positive difference in people’s lives and be a force for progress. We’re investing in education to give students the skills they need to shape the future.

We’re helping to create pathways of opportunity for communities of color through our Racial Equity and justice initiative. And every day we’re building an even more inclusive and diverse Apple rooted in our culture of belonging. To better understand how our work intersects with our values, look no further than what we’re doing for the environment. We just celebrated Earth Day in April, and during that month, Apple announced that its global manufacturing partners now support over 13 gigawatts of renewable energy, a nearly 30% increase in just the last year. This translates to 17.4 million metric tons of avoided carbon emissions, the equivalent of removing nearly 3.8 million cars from the road. We’re all investing up to an additional $200 million in our Restore Fund, which is designed to support innovative, scalable, nature based carbon removal projects, with the goal of removing 1 million metric tons of carbon every year.

These are just the latest steps on our journey toward our 2030 goal to be carbon neutral across our supply chain and lifecycle of our devices. At the same time, we’re advancing renewable energy across our supply chain, we’re also sourcing more recycled materials in our products. Last month, we announced our plans to have all Apple design batteries include 100% certified recycled cobalt by 2025, and we remain committed to one day using only recycled and renewable materials in our products. We have a deep sense of mission here at Apple. We believe in the power of innovation to build a better world. We are determined to do our best work on behalf of our customers and to give them the tools that can enrich lives. So we will manage for the long term, just as we always have, with our eyes to the horizon, with limitless creativity, and with a deep belief that we can achieve anything we put our minds to.

With that, I’ll turn it over to Luca.

Luca Maestri: Thank you, Tim, and good afternoon, everyone. Revenue for the March quarter was $94.8 billion, down 3% from last year and better than our expectations. Foreign exchange had a negative impact of over five percentage points on our results, in line with what we had expected. On a constant currency basis, our revenue grew year-over-year in total and in the majority of the markets we track. In addition to the records in emerging markets that Tim mentioned, we also set March quarter records in Australia, Canada, Spain and Switzerland, among others. Products revenue was $73.9 billion, down 5% from last year, due to challenging compares on Mac and iPad. iPhone, however, reached a March quarter revenue record thanks to very strong performance in emerging markets from South Asia and India to Latin America and the Middle East.

During the quarter, our installed base of active devices continued to grow at a nice pace thanks to extremely high levels of customer satisfaction and loyalty, and reached an all-time high for all major product categories and geographic segments. Our Services set an all-time revenue record of $20.9 billion, up 5% year-over-year, on top of growing 17% in the March quarter a year ago. We reached an all-time services revenue record in Greater China and March quarter records in Americas, Europe and Rest of Asia Pacific. Company gross margin was 44.3%, up 130 basis points from last quarter, driven by cost savings and favorable mix shift towards services partially offset by leverage. Products gross margin was 36.7%, decreasing 30 basis points sequentially due to seasonal loss of leverage and mix, partially offset by favorable costs.

Services gross margin was 71%, up 20 basis points sequentially. Operating expenses of $13.7 billion were at the low end of the guidance range we provided at the beginning of the quarter and continued to decelerate from the December quarter. We are closely managing our spend, but remain focused on long term growth with continued investment in innovation and product development. Net income was $24.2 billion. Diluted earnings per share were a $1.52, unchanged versus last year, and we generated very strong operating cash flow of $28.6 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue set a March quarter record of $51.3 billion, up 2% year-over-year despite significant foreign exchange headwinds and a challenging macroeconomic environment.

We set March quarter records in several developed and emerging markets with India, Indonesia, Turkey and the UAE doubling on a year-over-year basis. Our active installed base of iPhone grew to a new all-time high and was up in all our geographic segments. We are very pleased by the results of the latest survey of US Consumers from 451 Research, which measured customer satisfaction at 99% for the iPhone 14 family. Mac revenue was $7.2 billion, down 31% year-over-year and in line with our expectations. These results were driven by the challenging macroeconomic environment coupled with a difficult compare against last year’s launch of the completely reimagined M1 MacBook Pros. Despite this, the installed base of active Macs reached an all-time high across all geographic segments and we continue to see strong upgraded activity to Apple silicon.

Also, the latest survey of US Consumers from 451 Research reported customer satisfaction at 96% for Mac. iPad generated $6.7 billion in revenue, down 13% year-over-year and in line with our expectations. This performance was due to two key factors, a tough compare against the launch of iPad Air powered by the M1 chip in the year ago quarter and headwinds from the macroeconomic environment. The iPad installed base reached a new all-time high in all geographic segments thanks to exceptional customer loyalty and a high number of new customers. In fact, over half of the customers who purchased iPads during the quarter were new to the product. Wearables, home and accessories revenue was $8.8 billion, down 1% year-over-year as the category experienced the impact from the macroeconomic environment.

However, we did set March quarter records both in the US and in Greater China. We continue to see strength in our Watch installed base, which set a new all-time record, thanks to very high customer loyalty and new two rates, nearly two thirds of customers purchasing an Apple Watch during the quarter were new to the product. Moving to Services, we reached a new all-time revenue record of $20.9 billion. And in addition to the all-time records Tim mentioned earlier, we set March quarter records for advertising Apple Care and Video. Despite these records, as we saw in recent quarters, certain services offerings such as digital advertising and mobile gaming continue to be affected by the current macroeconomic environment. Stepping back, however, the continued growth in Services is the reflection of our ecosystem strength and the positive momentum we are seeing across several key metrics.

First, our growing installed base of over 2 billion active devices represents a great foundation for future expansion of our ecosystem. We continue to grow across every major product category and geographic segment, thanks to very high levels of customer loyalty and satisfaction. Second, we saw increased customer engagement with our services during the quarter. Both our transacting accounts and paid accounts grew double digits year-over-year, each setting a new all-time record. Third, paid subscriptions showed strong growth. We now have more than $975 million paid subscriptions across the Services on our platform, up 150 million during the last 12 months and nearly double the number of paid subscriptions we had only three years ago. And finally, we continue to improve the breadth and the quality of our current services offerings from new content on Apple TV Plus to great new features available in Apple Pay and Apple Music, which we believe our customers will love.

Turning to the enterprise market, we see business customers continuing to invest in the Apple platform to drive higher employee productivity and satisfaction. In Brazil, Boticario Group, the world’s largest cosmetics franchiser, originally starting with iPhone, 12 employees manage operations across a network of retail stores, franchisees and resellers. As it continues to digitize its business, Boticario has chosen to move all software development in house and adopted Mac as the standard device for all of their developer teams across the world. In small business, we see an increasing number of customers relying on Apple hardware, software and services to power their businesses forward, from accepting payments on iPhone, to tracking inventory on Mac or iPad, to managing employee devices with Apple Business Essentials.

As we celebrate National Small Business week here in the US, we are proud to continue supporting the small business community. Let me now turn to our cash position and capital return program. We ended the quarter with over $166 billion in cash and marketable securities. We repaid $2.3 billion in maturing debt and increased commercial paper by about $300 million, leaving us with total debt of $110 billion. As a result, net cash was $57 billion at the end of the quarter. During the March quarter, we returned over $23 billion to shareholders, including $3.7 billion in dividends and equivalents and $19.1 billion through open market repurchases of $129 million Apple shares. Given the continued confidence we have in our business now and into the future, today our Board has authorized an additional $90 billion for share repurchases as we maintain our goal of getting to net cash neutral over time.

We’re also raising our dividend by 4% to $0.24 a share, and we continue to plan for annual increases in the dividend going forward. As we move ahead into the June quarter, I’d like to review our outlook, which includes the types of forward looking information that Suhasini referred to at the beginning of the call. We expect our June quarter year-over-year revenue performance to be similar to the March quarter, assuming that the macroeconomic outlook does not worsen from what we are projecting today for the current quarter. Foreign exchange will continue to be a headwind and we expect a negative year-over-year impact of nearly four percentage points. For Services, we expect our June quarter year-over-year revenue growth to be similar to the March quarter, while continuing to face macroeconomic headwinds in areas such as digital advertising and mobile gaming.

We expect gross margin to be between 44% and 44.5%. We expect OpEx to be between $13.6 billion and $13.8 billion. We expect OINE to be around negative $250 million excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. Finally reflecting the dividend increase I mentioned earlier, today, our Board of Directors has declared a cash dividend of $0.24 per share of common stock payable on May 18, 2023, to shareholders of record as on May 15, 2023. With that, let’s open the call to questions.

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Q&A Session

Operator: We will go ahead and take our first question from Erik Woodring of Morgan Stanley.

Erik Woodring: Hey, good afternoon, guys. Thank you so much for taking the questions. Tim, maybe if we start with you. If we go back to the December quarter and the shutdowns, the production shutdowns around the time I think the question a lot of us were asking was how should we think about the deferral of demand versus destruction of demand? March quarter was quite strong 2% year-over-year iPhone growth. And so as we sit here in May, how have you seen that customers that weren’t able to purchase during the December quarter behave? Meaning, are you seeing that they deferred purchases to March and June? Could they be deferring purchases to later and hopes of buying a new iPhone? Just how should maybe we think about the cadence of that and then I have a follow up. Thanks.

Tim Cook: Yes. Hi, Erik. It’s hard to quantify this, but we do believe we did recapture some amount of sales in the March quarter as we did see the iPhone performance accelerate relative to the December quarter. The production levels for the whole quarter were where we wanted them to be. So supply was not an issue during Q2.

Erik Woodring: Okay, perfect. Thank you for that color. And then, Tim, maybe to follow up, it’s been three or four quarters now that you’ve mentioned emerging markets like India and others. And I imagine, having just opened two new stores in the country, clearly an important market for you. So maybe can you just talk about why you see India as such an important market and others, how you think about monetization trends in the country and specifically what you have to do within the country to really ensure that India becomes maybe a more material mix of your business? And that’s it for me. Thanks so much.

Tim Cook: Yes, sure. Looking at the business in India, we did set a quarterly record, grew very strong, double digits year-over-year. So it was quite a good quarter for us, taking a step back, India is an incredibly exciting market. It’s a major focus for us. I was just there, and the Dynamism in the market, the vibrancy is unbelievable. Over time, we’ve been expanding our operations there to serve more customers, and three years ago, we launched the Apple Store online, and then, as you just mentioned, we launched two stores just a few weeks ago, and they’re off to a great start, one in Mumbai and one in Delhi. We’ve got a number of channel partners in the country as well that we’re partnering with, and we’re very happy with how that’s going overall.

Overall, I couldn’t be more delighted and excited by the enthusiasm I’m seeing for the brand there. There are a lot of people coming into the middle class, and I really feel that India is at a tipping point, and it’s great to be there. On other emerging markets, we had a stellar quarter in emerging markets overall, as I had mentioned, with records set in a number of different places, including Indonesia and Mexico, the Philippines, Saudi Arabia, Turkey, UAE, and then quarterly records in Brazil, India and Malaysia. And so it was a great quarter for emerging markets in general, despite the headwinds of the currency that Luca mentioned. And so we’re putting efforts in a number of these markets and really see, particularly given our low share and the dynamics of the demographics, et cetera, a great opportunity for us in those markets.

Operator: Our next question is from Mike Ng of Goldman Sachs.

Mike Ng: Hey, good afternoon. Thank you very much for the question. It was encouraging to hear about the record installed base across iPhone and across all devices. It’s been, I think, double digit growth over the last few years across the active devices. I was just wondering, is that a good way to think about the installed base growth going forward? And then for the iPhone installed base specifically, I was just wondering if you could provide a little bit of texture around how you think about the growth there, whether regionally or by first, smartphones versus switchers. And then I have a quick follow up.

Tim Cook: Yes. If you look at the installed base of active devices now, overall it’s more than $2 billion. As you know, we announced in January that we surpassed that. And this quarter, our Q2 rather we set new records across each of the geographic segments and each of the major product categories. And that’s despite declines in current quarter sales, in particular in Mac and iPad. This is a huge asset for us, and it’s a testament to the overall customer satisfaction and engagement and loyalty of our customers. And so we view this as a major asset for us. The iPhone base is well over a $1 billion active devices. We see this as upgrade rates, and these sorts of things may change quarter-to-quarter depending upon macroeconomic. But if you back up and look at the installed base, we feel great about the size of it and the rate that it’s growing.

Mike Ng: Great. Excellent. And then it was also encouraging to see the number of devices per iPhone user continue to grow. I was just wondering if you could talk about the opportunity to continue to increase that number of Apple devices per iPhone user and if you have any color around how the monetization per user may differ from those, for lack of better words, super users versus those that may not be as deep into the ecosystem. Thanks.

Tim Cook: We try really hard to design our products in such a way that they work seamlessly together, and so whether that’s the watch or the Mac, so that you can start working on one device and finish it on the other. And so there are a good deal of people out there that have multiple Apple devices, and I think this is a testament to the customer satisfaction and loyalty that we’ve been able to get from the incredible design that our engineering teams do on our products.

Operator: Our next question is from Shannon Cross of Credit Suisse.

Shannon Cross: Thank you very much. Thank you for taking my question. Tim, can you talk a bit about AI? It’s obviously more than the topic of the day. It seems like the topic of the year. Just how you think about it through your products and services. I know you use it in different ways, but also if you can just give us any thoughts you have on generative AI and I don’t know where you see it going, not sure what you want to say on it, but I’m really curious for your take. Thank you.

Tim Cook: Yes, thanks for the question, Shannon. As you know, we don’t comment on product roadmaps. I do think it’s very important to be deliberate and thoughtful in how you approach these things. And there’s a number of issues that need to be sorted, as is being talked about in a number of different places. But the potential is certainly very interesting. And we’ve obviously made enormous progress integrating AI and machine learning throughout our ecosystem and we weaved it into products and features for many years as you probably know. You can see that in things like fall detection and crash detection and ECG, these things are not only great features, they’re saving people’s lives out there. And so it’s absolutely remarkable. And so we are, we view AI as huge and we’ll continue weaving it in our products on a very thoughtful basis.