Apple's second-quarter results for 2017 are in. Here's our transcript of the call.
Apple CEO Tim Cook and CFO Luca Maestri spoke with analysts during the company's Q3 2017 earnings call. Here's our ongoing live transcript of their remarks! If you want more info on Apple's results, we recommend checking out the awesome charts from Six Colors.
Cook's opening remarks
Today we're proud to announce very strong results for our fiscal third quarter with unit and revenue growth in all of our product categories. We'll review our financial performance in detail and I'd also like to talk about some of the major announcements we made in June at our World Wide Developers Conference. It was our biggest and best WWDC ever and the advances we introduced across hardware, software, and services will help us delight our customers and extend our competitive lead this fall and well into the future.
For the quarter, total revenue was at the high end of our guidance range at 45.4 billion. That's an increase of 7% over last year, so our growth rate has accelerated in three successive quarters this fiscal year. Gross margin was also at the high end of our guidance and we generated a 17% increase in earnings per share.
iPhone results were impressive, with especially strong demand at the high end of our lineup. iPhone 7 was our most popular iPhone and sales of iPhone 7 Plus were up dramatically compared to 6s Plus in the June quarter of last year. The combined iPhone 7 and 7 Plus family was up strong double digits year over year. One decade after the initial iPhone launch we have now surpassed 1.2 billion cumulative iPhones sold.
Services revenue hit an all-time quarterly record of $7.3 billion, representing 22% growth over last year. We continue to see great performance all around the world, with double-digit growth in each of our geographic segments. Over the last 12 months, our services business has become the size of a Fortune 100 company — a milestone we've reached even sooner than we had expected.
We had very positive results for iPad with broad-base growth in units, revenue, and market share. iPad sales were up 15% year over year and grew across all of our geographic segments. We achieved our highest global market share in over four years, based on IDC's latest estimate of tablet market results for the June quarter. And in markets like China and Japan, over half of iPads sold were to people buying their very first iPad. Our iPad product lineup is stronger than ever. The new iPad we launched in March offers great value and performance and the all-new 10.5-inch iPad Pro, launched in June, features the world's most advanced display with ProMotion technology and is more powerful than most PC desktops. iPad is the perfect tool for teaching in new and compelling ways and our iPad results were especially strong in the U.S. education market where sales were up 32%, year over year, to over one million units. We believe coding is an essential skill that all students should learn. We're thrilled that over 1.2 million students of all ages are now using iPad and Swift Playgrounds to learn the fundamentals of coding, and over 1,000 K-12 schools across the U.S. plan to use Apple's Everyone Can Code in their curricula this fall. And for high school and community college students who want to pursue careers in the fast-growing app economy, we announced App Development with Swift, an innovative, full-year curriculum designed by Apple engineers and educators and provided free to schools to teach students to code and design fully functional apps gaining critical job skills in software development and information technology.
I'd like to turn now to Mac, which gained global unit market share and reached new June quarter unit sales records in mainland China and Japan. Mac revenue grew 7% year over year driven by the strength of the MacBook Pro and iMac, despite IDC's latest estimate of a 4% unit contraction in the global PC market. And with the refresh of almost our entire Mac lineup in June, we're off to a great start for the back to school season.
Sales of Apple Watch were up over 50% in the June quarter, and it's the number-one selling smart watch in the world by a very wide margin. Apple Watch is having a positive impact on people's health and daily lives, motivating them to sit less and move more. With features like built-in GPS and waterproofing, Apple Watch Series 2 is the perfect companion for hiking, running, and swimming.
We're also seeing incredible enthusiasm for AirPods with 98% customer satisfaction, based on Creative Strategies survey. We have increased production capacity for AirPods and are working very hard to get them to customers as quickly as we can, but we are still not able to meet the strong level of demand.
We made some big announcements during the June quarter that I'd like to quickly review. We launched a new investment in the future through our advanced manufacturing fund. We've earmarked at least $1 billion for this program aimed at helping our manufacturing partners develop innovative production capabilities and create high skilled jobs in the United States. We believe this can lay the foundation for a new era of technology driven manufacturing in the U.S. The first $200 million from the fund has been committed to Corning to support R&D, capital, equipment needs, and state-of-the-art glass processing. And as we announced it WWDC, we have a very exciting fall ahead, with stunning advances in iOS 11, macOS High Sierra and watchOS 4. iOS 11 will make iPhone better than ever, with Apple Pay peer-to-peer payments, an even more intelligent and natural Siri, new expressive messages with full screen effects, richer and more powerful maps, enhanced Live Photos, memories, and Portrait Mode effects, and much much more. iOS 11 will also take the iPad experience to a whole new level with features such as a customizable dock, multi-touch drag and drop, powerful new multitasking, more efficient QuickType, and great new markup and scanning capabilities.
One of the most exciting and most promising announcements from WWDC was the introduction of ARKit, a new set of tools for developers to create augmented reality apps. It's still early in the beta period, but it's clear that ARKit has captured the imagination of our developer community. We think ARKit will help the most creative minds in the industry tap into the latest computer vision technologies to build engaging content. We believe AR has broad mainstream applicability across education, entertainment, interactive gaming, enterpris,e and categories we probably haven't even thought of. With hundreds of millions of people actually using iPhone and iPad today, iOS 11 will become the world's biggest augmented reality platform as soon as iOS 11 ships.
With iOS 11, we're also bringing the power of machine learning to all Apple developers with CoreML, enabling capabilities like face detection, object tracking, and natural language interpretation. CoreML lets developers incorporate machine learning technologies into their apps with all the processing done right on device, so it respects our customers data and privacy. For Mac, we provided a peek at the immersive gaming, 3D, and virtual reality experiences made possible with the upcoming release of macOS High Sierra and the amazingly powerful new iMac Pro. We're proud to make the best personal computers in the industry and are very excited to deliver even more innovation in the months to come.
Apple Watch will become more intelligent than ever this fall with watchOS 4, featuring a proactive Siri watch face, personalized activity coaching, and an entirely new music experience. watchOS 4 also introduces GymKit, a groundbreaking technology platform to connect workouts with cardio equipment.
We also previewed HomePod, a breakthrough wireless speaker for the home that delivers amazing audio quality and uses spatial awareness to sense its location in the room and adjust the audio automatically. Visitors to our listening room at WWDC were blown away by the HomePod's incredible sound, which is unlike any other wireless home speaker on the market. With deep knowledge of music, HomePod is designed to work with your Apple music subscription to help you enjoy the music you already love as well as to discover great new music based on your personal preferences. As an intelligent home assistant, HomePod is a great way to send messages, set a timer, get updates on news, sports, and weather, or control smart HomeKit devices by simply asking Siri to turn on the lights, close the shades, or activate a scene.
We can't wait to deliver all of these powerful innovations in the months to come, and we might even have some others to share with you later in the year. Now for more details on the June quarter results, I'd like to turn the call over to Luca.
Revenue for the June quarter was 45.4 billion, up 7% over last year, an acceleration to the growth rate we reported during the first half of our fiscal year. We achieved these results despite a 200 basis point negative impact from foreign exchange on a year over year basis, as currency movements — especially in Europe in China affected our reported results. Our performance was very strong across the board, with growth in all our product categories and almost every market around the world. We achieved double-digit revenue growth in many developed markets, including the U.S., Canada, Germany, Spain, Australia, and Korea, and emerging-markets outside of greater China grew 19% over a year ago. Gross margin was 38.5% at the high end of our guidance range, operating margin was 23.7% of revenue, and net income was 8.7 billion. Diluted earnings per share were $1.67, up 17% over last year, and cash flow from operations was 8.4 billion. During the quarter we sold 41 million iPhones and reduced iPhone channel inventory by 3.3 million units, leaving us with our lowest level of channel inventory in 2.5 years and well within our 5- to 7-week target inventory range. iPhone sales were up year over year in most markets we track, with many markets in Asia, Latin America, and the Middle East growing unit sales by more than 25%. We are very pleased with these iPhone results, especially considering the tough comparison to the June quarter last year when we launched iPhone SE. iPhone ASP was $606, up from $595 a year ago thanks to strong demand for iPhone 7 Plus, which represented a higher percentage of the iPhone mix compared to the Plus model a year ago. The impact of the stronger mix on ASP was partially offset by negative foreign exchange, year over year, and the reduction in channel inventory which took place entirely at the high end of the portfolio. Customer interest and satisfaction with iPhone are very strong with both consumers and business users. In the U.S., the latest data from 451 Research on consumers indicates a 95% customer satisfaction rating for iPhone 7 and 99% for iPhone 7 Plus. Among consumers planning to buy a smartphone, purchase intention for iPhone was nearly three times the rate of our closest competitor. Among corporate smartphone buyers, iOS customer satisfaction was 94%, and of those planning to purchase smartphones in the September quarter, 78% plan to purchase an iPhone.
Turning to services we set an all-time record of $7.3 billion, up 22% year over year. The App Store was a major driver of this performance and according to App Annie's latest report, it continues to be, by a wide margin, the preferred destination for customer purchases, generating nearly twice the revenue of Google Play. Revenue from our Apple Music streaming service and from iCloud storage also grew very strongly and across all our services offerings, the number of paid subscriptions reached over 185 million, an increase of almost 20 million in the last 90 days alone. The reach, usage, and functionality of Apple Pay continue to grow. We launched Apple Pay in Italy in May and the UAE, Denmark, Finland, and Sweden are scheduled to go live before the end of this calendar year. Apple Pay is by far the number one NFC payment service on mobile devices with nearly 90% of all transactions globally. Momentum is strongest in international markets where the infrastructure for mobile payments has developed faster than in the US. In fact, three out of four Apple Pay transactions happen outside the US. And with the launch of iOS 11 this fall, our users in the US will be able to make and receive person-to-person payments quickly, easily, and securely.
Next I'd like to talk about the Mac. Thanks to great performance from the new MacBook Pro, we generated 7% revenue growth over last year and gained share in the global PC market based on the latest data from IDC. Customer satisfaction for Mac is very strong at 97%. In the most recent survey from 451 Research, our active install base of Macs has grown double digits over a year ago. We ended the quarter within our 4- to 5-week target range for Mac channel inventory and we have a great line-up of Macs for our customers heading into the busy back to school season.
Turning to iPad, we sold 11.4 million units, up 15% over last year. We were happy to see iPad growth in each of our geographic segments with strong double digit increases in key markets, such as the U.S., Japan, Germany, France, and greater China. We exited the quarter within our 5- to 7-week target range for iPad channel inventory. NPD indicates that iPad is at 55% share of the U.S. tablet market in the month of June, including 8 of the 10 best-selling tablets. That's up from 46% share a year ago. And among tablets priced over $200, iPad share was 89%. In addition, the most recent survey from 451 Research measured business and consumer satisfaction rates ranging from 95% to 99% across iPad models, and among those planning to buy tablets, purchase intent for iPad was over 70%. Our enterprise business continues to expand and our customers are transforming the way work gets done with iOS and iPad. Wal-Mart will be deploying more than 19,000 iPads for employee training across 50 states with projections of over 225,000 associates trained on iPad by the end of the year. The initial response from businesses to iOS 11 and the new iPad Pro has been amazing, and companies including Bank of America, Medtronic, and Panera tell us that they will be rolling out the 10.5-inch iPad Pro throughout key areas of their organizations. We're also seeing real traction with our enterprise partners. Just last month we unveiled the next set of technology enhancements in our partnership with Cisco. This new wave adds a whole new category of security features designed to help enterprises and employees defend against growing cyber threats. We believe this investment in our joint security solutions for iOS will make cyber insurance even more attainable for businesses. SAP is making great strides since launching the SAP Cloud Platform SDK for iOS in March with a pipeline of hundreds of global opportunities. SAP has also released SuccessFactors Mobile, its first native iOS app for human resources, which will support 47 million iPhone and iPad users worldwide across multiple industries. And our partnership with Deloitte has recently expanded to several more European countries. We're helping clients transform their businesses with iOS, we jointly develop programs such as the connected store, a pop up version of a retail environment demonstrating iOS tools for sales and demand generation, as well as tailored apps for sales associates, store management, and customers.
We also had a tremendous quarter for iPad in education up 32% year over a year following the launch of our new iPad in March, an update to our popular classroom app, and continued enhancements to iOS that make managing iPads in the classroom even easier. The St. Paul Public School District in Minnesota is renewing its one to one program by deploying over 40,000 iPads across every student and teacher in the district. iPad was chosen because of its power and durability, ease of use, multimedia and accessibility features, and the extensive catalog of iOS apps designed specifically for education. The Shawnee Mission School District outside Kansas City recently purchased 19,000 iPads extending its one to one program started in 2014 thanks to iPads intuitive interface, superior reliability, and expansive ecosystem of iOS tools for education.
It was a very busy quarter for our retail and online stores, which collectively welcomed over 300 million visitors. In addition to our spectacular new store at the Dubai Mall, we opened our first stores in Singapore and in Taiwan during the quarter, expanding our total store footprint to 497 stores. In May, we kicked off Today at Apple with new in-store programming, from music, to photography, to art, and coding. And our stores collectively hosted 87,000 sessions during the quarter. as Tim mentioned last quarter, we have entered a new chapter in retail with unique and rewarding experiences for our customers and some stunning new stores coming in the near future.
Let me now turn to our cash position. We ended the quarter with 261.5 billion in cash, plus marketable securities, a sequential increase of 4.7 billion. 246 billion of this cash, 94% of the total, was outside the United States. We retired 3.5 billion of debt and issued the equivalent of 10.8 billion dollars in new euro and U.S. dollar denominated debt during the quarter, including our second green bond, bringing us to 96.4 billion in term debt and 12 billion in commercial paper outstanding. We also returned 11.7 billion to investors during the quarter. we paid 3.4 billion in dividends and equivalence and spend 4.5 billion on repurchases of 30.4 million Apple shares through open market transactions. We launched a new $3 billion ASR program, resulting in initial delivery and retirement of 15.6 million shares. and we retired 3.4 million shares upon the completion of our 10th ASR during the quarter. We have now completed 222.9 billion of our 300 billion capital return program, including 158.5 billion in share repurchases.
As we move ahead into the September quarter, I'd like to review our outlook which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between 49 and 52 billion dollars. We expect gross margin to be between 37.5 and 38 percent. We expect OpEx to be between 6.7 and 6.8 billion. We expect OINE to be about 500 million, and we expect the tax rate to be about 25.5 percent. Also today our board of directors has declared a cash dividend of 63 cents per share of common stock, payable on August 17, 2017 to shareholders of record as of August 14, 2017. With that, I'd like to open the call to questions.
Katy Huberty, Morgan Stanley: Yes, thanks, good afternoon. Luca, first question for you. Gross margin guidance is strong, but it did take down from your June quarter guidance and you also narrowed the range to 50 basis points. I wonder if you can just address what is the driver of the sequential down tick and what gives you confidence that you have more visibility than you did three months ago?
Katie, sequentially, from 38.5 that we just reported, typically we have product transition costs during the September quarter — that's the primary driver, this happens fairly regularly for us. We also have a more difficult memory pricing environment this year than a year ago. And we think that we're going to be able to partially offset this with the positive leverage as you've seen. We've guided up, sequentially, in revenue. So those are the major puts and takes. In terms of the range that we use for our gross margins, we have a fairly good understanding on where we are with our hedging program and that allows us to mitigate some of the volatility there. So we felt we could guide to a slightly narrower range, which we've done occasionally in the past.
Thank you, and maybe a question for both Tim and Luca: As you outlined on this call and at the Developer Conference in June, there is an unprecedented number of products that either ramp to volume or launch in the back half of this year, so appreciating you only formally guide a quarter out, I wonder if there's any qualitative commentary you can provide to help us think about the back half of this calendar year and how all those new products that come into the model could impact either revenue seasonality versus past years, or could impact just the costs associated with ramping that many products all at once. Thanks.
Katie, as Luca mentioned we did assume some transitional costs and our guidance for the quarter, as is typically the case. We're looking very much forward to the product rollouts.
Shannon Cross, Cross Research: Thank you very much for taking my question. Tim, could you talk a bit about what you're seeing in China. You know, I think obviously there's continues to be strong demand for smartphones that perhaps mix shift. I think you brought back the iPhone 6 this quarter to be a bit more price aggressive. And then can you just talk a bit about how you see that market developing with the growth of WeChat and some of the other developments that are happening there? Thank you.
Thanks, Shannon. We were very encouraged by the results this quarter. We improved as we thought we would from the previous quarters — a little more than I thought we would. If you look underneath the numbers, mainland China was actually flat year over year, during Q3, and in constant currency terms, we were actually up 6% in mainland China. So we're very encouraged by that. iPad grew dramatically more than the market, the Mac grew much more than the market, iPhone was relatively flat year on year as the same sort of similar as the market was. And so we see all of those as very encouraging signs. On top of that, services grew extremely strongly during the quarter. Hong Kong continued to drag down the total greater China segment, but on a sequential basis we're probably sort of at the trough of that, which is nice. With the peg to the dollar there, from a currency point of view, and tourism being what it is, I don't really know when that market will come back, but what we see in the mainland is definitely much more encouraging. It's interesting to note that upgraders, both for the quarter and actually for the full fiscal year to date, was our highest ever. So that we felt very good about. In terms of WeChat, the way that I look at this is because iOS share is not nearly a majority of the market in China, the fact that a lot of people use that makes the switching opportunity even greater. And I think that's more the case than the risk that a lot of folks have pointed out. And so I see Tencent as one of our biggest and best developers. They've done a great job of implementing a lot of iOS features in their apps and we are looking forward to working with them even more to build even greater experiences for our mutual users in China.
Great, thank you. And then, can you talk a bit about the composition of the installed base of iPhones at this point as, obviously, we're getting close to a refresh. You brought in the iPhone SE, you've obviously had strength at the high end — I'm just trying to think about what percent do you think have upgraded in the prior generation ... any color you can give us on that?
From an absolute quantity point of view, the upgrades for this fiscal year are the highest we've seen, so we feel good about that. However, if you look at it from an upgrade rate point of view instead of the absolute number, the rate is similar to what we saw with the previous iPhones — except for iPhone 6, which is, as we called out in the past, had an abnormally high upgrade rate. We do think that — based on the amount of rumors and the volume of them — that there is some pause in our current numbers. And so where that affects us in the short term, even though we had great results, probably bodes well later on.