Q4 2019 Earnings Call
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Hello.
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Good day, everyone welcome to the Apple incorporated fourth quarter fiscal year 2019 earnings Conference call. Today's call is being recorded at this time for opening remarks and introductions I'd like to turn the call over truth, Nancy Paxton Senior director of Investor Relations. Please go ahead.
Thank you good afternoon, and thanks to everyone for joining US speaking first today, it's apples CEO , Tim Cook and he'll be followed by CFO Lukemire Street and after that we'll open the call for questions from analysts.
Please note that somebody information you'll hear during our discussion today will consist of forward looking statements, including without limitation that was regarding revenue gross margin operating expenses other income and expense taxes capital allocation and future business outlook.
Actual results or trends could differ materially from our forecast for.
For more information please refer to the risk factors discussed in apples. Most recently filed periodic reports on Form 10-K and Form 10-Q .
And the form 8-K filed with the FCC 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 date.
I'd now like turn the call over to Tim for introductory remarks. Thank you Nancy good afternoon, and thanks to all of you for joining us, especially those of you listening in on our new noise canceling airports pro which are available beginning today.
This was Apple highest revenue in the September quarter ever and I want to take you through some of the highlights before we get into greater detail on the conclusion of a remarkable fiscal 2019 for Apple.
We achieved revenue of $64 billion into quarter at the high end of our expectation even in spite of a predicted foreign exchange drag of almost a billion dollars.
Geographically, we set new Q4 revenue records in the Americas in rest of Asia Pacific and saw further improvement in our revenue trends in greater China.
And I phone, where customers have only begun to get their hands on the strongly popular an unmatched iPhone 11, an iPhone 11 pro models our year over year performance continued to improve more on that in a moment.
Outside of iPhone, Our September quarter revenue was up 17%, we reached a new all time high for services with growth accelerating to 18%, we generated well over 50% revenue growth from Wearables and I'm thrilled to say that we said Q4 records for Wearables and each and every market.
Truck.
We've got a lot to cover so lets dive right into the details.
I phone revenue in the September quarter was $33 billion. This 9% decline over last year is a significant improvement over the 15% decline we saw cross the first three quarters.
The significant upswing in demand in the final cool part of the quarter is mirrored in the overwhelmingly positive reviews customer feedback and in store response, we've seen for this new generation or devices not to mention a wave of the best photos, you've seen from a smartphone.
I phone 11 features the Apple designed 813 bionic the fastest most powerful chip ever in a smartphone plus an all new dual camera system and even longer all day battery life all wrapped in six great new callers since its launch the iPhone 11 has quickly become our best selling iPhone.
I phone 11 pro and I phone 11, Promacta deliver even more advanced performance for users who want the very best out of their smartphone the new Super retina Xdr display is the brightest ever in an iPhone and the new Triple camera system provides a pro level photography experience with an ultra wide wide and tell.
The photo camera all three of our new iPhone speech or night mode, delivering huge improvements to photo capture in low light environments, either indoors or outdoors. They also produced the highest quality video and a smartphone supporting Fourk video with extended dynamic range for more highlight detail and.
Cinematic video stabilization.
I was 13 is driving user experience board across the iPhone family with a bold new look in dark mode major updates to the ABS, our customers use everyday such as far as an mabs new ways to help protect their privacy was signed in with Apple and performance improvements across the entire system.
For services revenue was $12.5 billion, that's up 18% over last year and it beats the previous record set in the June quarter by more than a billion dollars. This isn't a local phenomenon. We saw double digit services revenue growth an all time records in all five of our geographic segments.
And it wasn't a narrow success either we established new all time highs for multiple services categories, including the App store Applecare music cloud services, and our App store search AD business, we are well in our way to accomplishing our goal of doubling our fiscal year 16 services revenue during 2000.
Some 20.
I wanted to touch on a number of services in brief.
We had all time revenue Rec <unk> record revenues from payment services for Apple pay revenue in transactions more than doubled year over year with over 3 billion transactions in the September quarter exceeding pay pals number of transactions and growing four times as fast as.
Okay is now live and 49 markets around the world with over 6000 issuers on the platform.
We believe that Apple pay offers the best possible mobile payment experience and the safest most secure solution on the market, we're glad that thousands of banks around the world participate.
Apple cart launched in the U.S. in August and we've been thrilled by the positive reception. We've seen users can apply for Apple card through the wallet app on iPhone in minutes and start using it right away in stores and apps and on website.
They've told us they love Applecart simplicity privacy security and transparency, which has helped them make healthier financial choices.
Apple Cart has absolutely no fees and major apps and retailers like Uber <unk> AIDS Walgreens, Dwayne read and T. Mobile have already joined to offer 3% daily cash back on Apple card transactions.
And I'm very pleased to announce today that later this year, we're adding another great future to Apple card customers will be able to purchase their new iPhone and pay for it over 24 months with zero interest.
And they will continue to enjoy all the benefits of Apple card, including 3% catch back on the total cost of their new iPhone with absolutely no fees and the ability to simply manage their payments right in the Apple wallet App on iPhone.
We think these features appeal broadly to all iPhone customers and we believe this has been the most successful launch other credit card in the United States ever.
[noise] last month, we launched Apple arcade, our groundbreaking games subscription service.
Offering an all new way for the whole family to enjoy games online.
Or off lot.
Apple arcade subscribers get unlimited access to a curated selection of games for many of the most innovative developers in the world with almost 100, new titles play a role across iPhone I pad ipod touch Mac and Apple TV today and more are being added all the time.
Customer feedback to date has been overwhelmingly positive and we're very excited for the future of the service.
We're also thrilled to be working with Oprah Winfrey to bring Oprah's book club to Apple books, connecting a community of readers worldwide. Two important stories by today's most thought provoking authors to.
Together, we envision a vibrant global book club that has the power to bring the world together through reading.
We're also expanded the reach of Apple news plus beyond the United States in Canada to readers and Australia, and the United Kingdom, bringing together popular publications such as the times of London, The Australian and Hello Magazine. In addition to major publications like the Wall Street Journal, the La times, the New Yorker.
People GQ and much more.
And rounding out our newest services just two days from now we're launching into hotly anticipated Apple TV Plaza and over 100 countries and regions.
It's the first all original video subscription service, which shows from the best most ambitious and most creative minds in the industry.
One of the grey parts of this job is that I've gotten to Ben Ben to watch almost all of them and while I won't spoil anything there's so much to look forward to here for lovers, a great storytelling.
We premiered shows like see and the morning show an L.A. in New York over the past couple of weeks and the stage is set for a truly exciting debut.
And we're pleased that customers, who have purchased qualifying Apple devices. Starting September 10th can opt into 12 free months of Apple TV plus.
Turning to Wearables, we had amazing results. Thanks to the phenomenal popularity of Apple watch air pods and beats products as I said at the outset, We said Q4 revenue records for Wearables and every single market that we track around the world.
In September we launched Apple Watch series five with the always on retina display that means you never have to pause a workout or task.
To raise or tap the display.
New location features help users better navigate their day, while international emergency calling allows them to call emergency services directly from Apple watch and over 150 countries, even without an iPhone nearby.
And combined with the power of watch it was six users are empowered to take charge at their health and fitness with new features like cycle tracking the noise app and activity trends.
The easy GE up now available 32 markets, including India has become a widely celebrated illustration of apples commitment to your help giving users the ability to document and monitor the functioning of their hearts and provide critical data to their doctors.
We are deepening apples commitment to medical research, we announced a new research out paired with three unprecedented medical studies spanning hearing heart and movement and women's health, we're collaborating with leading health institutions to reach more participants than has ever been possible, enabling them to come.
Tribute to potential medical discoveries and help create the next generation of innovative health products.
Leveraging the devices customers use every day and world class security and privacy, we hope to democratized medical research and bring everyone to the table to make the next big breakthrough is possible.
Turning to I pad, we generated 17% growth driven by I've had pro and the ongoing momentum of our wider line up.
In September we introduced the seventh generation I pad, bringing more screen area and support for the full size smart keyboard to our most popular and most affordable I pad.
For the first time, we also released I pad awareness built on the same foundation is iOS, but with powerful apps designed for I pads large multi touch display letting users multi task with intuitive gestures and drag and drop a file with the fingertip.
For Mac, we generated $7 billion in revenue, we had a tough comparison to last year's fourth quarter. When we updated both models and my Macbook Pro but for fiscal 2019 overall, we generated the highest annual revenue ever from our Mac business in July we updated our Mac.
Portables with great pricing for students and Mac book Air in particular has been a hit in the back to school season.
Earlier this month, we released MCE West Catalina with all New entertainment apps. The innovative sidecar feature that uses I pad to expand the Mac workspace and new accessibility tools that enable users to control their Mac entirely with their voice.
Catalina also brings the Apple arcade experience to the bag and we're already seeing some amazing third party developers bring their iPad apps to the MCAT store woodmac catalysts, including Twitter posted and more and for our pro customers, who pushed the limits of what Matt can do we're very excited.
At the upcoming launch of our newly redesigned macro this fall, which we are proud to be manufacturing in Austin, Texas.
Pulling back the lens from a single quarter, we're incredibly proud of our car accomplishments over the course of a remarkable fiscal 2019, a year, where we crossed $100 billion in revenue in the United States for the first time.
We introduced new services from Apple card to to Apple TV, plus and generated over $46 billion in total services revenue setting new yearly services records and all five of our geographic segments and driving our services business to the size of a fortune 70.
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We delivered incredible new hardware and all our device categories are wearables business showed explosive growth in generated more annual revenue that two thirds of the companies in the fortune 500.
And we said a yearly revenue record for Mac.
All told outside of iPhone, our revenue grew by $17 billion to almost $118 billion.
Our overall success was achieved widely across our markets with annual revenue records in the U.S., Canada, Brazil, the UK, Germany, France, Italy, Poland, Korea, Malaysia, the Philippines and Vietnam.
And as we head into the holiday season, we have an enormous amount to look forward to.
We believe that we lead and innovation, because we lead with our values.
At the time with urgency in action on climate change, we continue to drive breakthroughs in clean power sustainable materials and device recycling.
By running 100% of our global operations on renewable energy and challenging our entire network of suppliers due to the same we're driving a virtuous cycle of demand for clean sources of power.
And we see the award Apple recently received from the United Nations Global Climate Action program as a mandate to deepen this vital work.
We continue to invent and improve on cutting edge renewable materials, including the 100% recycled aluminum alloy found in many of our products and.
And we've added rare earth elements to our list of recycled materials with the introduction of iPhone 11.
We're just assembling recycling or refurbishing millions of devices every year with the help of Daisy our recycling robot and we're pushing the entire global supply chain toward recycled or renewable materials.
We're driving access to critical coatings skill development for two educators and students through programs such as our teaching coating academies and our free everyone can code curriculum.
We continue to put user privacy at the center of everything that we do and we know that Apple is strongest when our commitment to diversity and inclusion brings all voices to the table.
I'd like to think our customers are developers our business partners and our employees for making fiscal 2019, such a success and I look forward to another great year end 2020.
Now for more details on our September quarter results I'll turn the call over to Luca. Thank you Tim Good afternoon, everyone.
Revenue for the quarter was 64 billion up 2% from a year ago to a new September quarter record.
As we had predicted foreign exchange negatively impacted our revenue by close to a billion dollars and in constant currency growth was 3%.
Products revenue was 51.5 billion down 1% from last year, mainly due to iPhone, but largely offset by very strong performance from Wearables and I pad.
Services revenue grew 18% to 12 and a half billion.
For the 1.9 billion year over year, and almost 1.1 billion sequentially to a new all time record with broad based growth around the world.
And across our portfolio.
On a geographic basis, we said new fourth quarter revenue records in our Americas and rest of Asia Pacific segments. We also saw continuous improvement in greater China, where year over year revenue comparisons became more favorable each quarter of fiscal 2019 from a 27.
Or send declining the first quarter, two a 2% decline in the fourth quarter out a country level, we established new Q4 records in many major developed and emerging markets, including the U.S. Canada.
Germany, France, Korea, Singapore, Brazil, India, Thailand, Malaysia and Vietnam.
Company gross margin was 38%.
Up 40 basis points sequentially, driven by leverage from higher revenue.
Products gross margin was 31.6% up 120 basis points sequentially due to leverage and favorable mix.
Services gross margin was 64.1% even with the June quarter.
Net income was 13.7 billion diluted EPS was a Q4 racket at $3.03 and up 4% year over year and operating cash flow.
Of 19.9 billion was also a Q4 racket up almost 400 million from the previous record we said last year.
Let me get into more detail for each of our revenue categories.
I phone revenue was 33.4 billion a year over year decline of 9%. This was a meaningful improvement to the 12% decline in the third quarter and the 16% decline in the first half of the fiscal year.
And we saw great customer response to the launch of iPhone 11, you had enpro and 11 Promacta at the ended the quarter.
Our active installed base of iPhone continue to grow to a new all time high in each of our geographic segments and in the U.S. The latest survey of consumers from four or five one research indicates iPhone customer satisfaction of 99% for iPhone 10 are 10 <expletive> .
And tennis smacks combined.
Among business buyers, we plan to purchase smartphones in the December quarter, 83% planned to purchase I phones.
Turning to services.
We had a very strong quarter, we'd all time record performance and growth accelerating from the June quarter of five geographic segments set new all time services revenue Records and all grew double digits. We will establish new all time records for the App store Applecare music cloud services.
Payment services, and our App store search AD business in total services accounted for 20% of our revenue mix and 33% of our gross margin mix.
Passenger engagement in our ecosystem continues to grow and the number of both transacting and paid accounts.
On our digital content stores reached a new all time high with double digit growth in paid accounts in all our geographic segments. We now have pull that 450 million paid subscriptions.
Across the services on our platform compared to over 330 million, just a year ago, and we're well on our way to our goal of surpassing the 500 million Mark during 2020.
[noise] absolute revenue grew strong double digits, thanks to robust customer demand for both in App purchases and subscriptions.
Our third party subscription business grew across multiple categories and increase almost 40% year over year that are now more than 35000 subscription absent our platform with the largest accounting for less than zero point, 25% of Toyota services revenue.
Among our many all time services rack is he was the best quarter ever for Applecare.
Thanks to strong service agreement attach rates and expanded distribution.
And to better meet our customers needs, we announced a new iPhone repair program, making it easier for independent provide us across the U.S. to tap into the same resources as our Apple authorized service provider network and operating cost them as additional options for the most common out of warranty Iceland repairs.
The new program compliments, our continued investment in our growing global network of over 5000, Apple authorized service providers that lead the industry forecasts and the satisfaction and have millions of people, we both in and out of warranty service for all output products.
Next I'd like to talk about the Mac revenue was 7 billion down 5% from last year due to a different mix of products given the strength of our Mac book Air lineup and a difficult comparison to last year's launch of Mac boot Macbook Pro models.
Despite the tough compare we generated an all time revenue record for Mac in the U.S. and in India, and a fourth quarter revenue record in Japan.
More than half of the customers purchasing Max during the quarter when new to Mac and the active installed base of Max again reached a new all time high.
We had great results for I pad with revenue of 4.7 billion up 17% from a year ago iPad revenue growing all five of our geographic segments with a Q4 revenue record in Japan in total over half of the customers purchasing I pads during the September quarter, when new too I Fad.
And the I pad active installed base also reached a new all time high.
The most recent surveys from four or five one research measured a 95% customer satisfaction rating for <unk> from consumers and 97% from businesses.
And among both consumers and businesses, who plan to purchase tablets into December quarter more than 80% plan to purchase I pads.
Wearables home and accessories establish a new fourth quarter record with revenue of 6.5 billion up 54% year over year, we growth accelerating from the third quarter across all five geographic segments. The performance was driven by tremendous growth across Apple watch airports.
These products and accessories and if they mentioned, we said Q4 records for Wearables category in every single market, we track around the world.
Our retail and online stores produce fantastic results generating rack the September quarter revenue in all five geographic segments.
And strong double digit growth across iPhone, I pad, Apple watch and accessories.
We also continued to see great results from our trade in program, we more than five times, the iPhone trading volume, we had a year ago.
Last month Wideopen this funding apophis, Bob any starting New York.
We then even more welcoming layout beneath the landmark glass Q, providing nearly twice the space of the original store.
This iconic store is opened seven days a week 24 hours a day and provides an even better environment for customers to experience our latest products meet with our genius is created pros and specialists and attend our free daily today at Apple sessions.
We also opened our newest and largest stored in Japan, and fixed starting Tokyo and demo nutrition business. This today across from the story Tokyo station.
And we opened a beautiful new store in the heart of Mexico cities by brand plan could this vidic to welcome visitors to experience the best of Apple in Mexico.
We're seeing strong demand for our products in the enterprise market will grow significantly ahead of our business overall and we have great momentum transforming major industries. One example is retail 80 of that hundred largest retailers in the world are choosing apple to modernize their customers.
An employee experiences across all functions of their business. The retailers are using iPhone iPad and Mac to optimize their back of house operations modernize fine to sale and deliver differentiated customer and employee experiences have somebody engagement and assisted selling at being able to so particular focus.
And we're seeing great results for iconic brands, such as Burberry, Ralph Lauren set for USA gas gap Inc. and many others.
We're also had been government agencies around the world used technologies to improve the effectiveness and efficiency of the way to deliver critic of services to the public for example.
The U.S. census Bureau is making fundamental changes.
So the design and implementation of next year senses, we had growth of producing quality results, where did using costs by leveraging the mobility use that experience and privacy of iOS hundreds of thousands of Apple devices will be deployed this fiscal year to support an innovative new models for the collection.
The management of census data.
And we are proud that our products will play an important role in driving quality to this critical initiative, while safeguarding the privacy and security of this data.
CDW.
Apis partner in this initiative will also utilize apples financial services, our enterprise financing platform to help minimize the cost to the public by taking advantage of the uniquely strong residual value of Apple devices.
Let me now turn to all the cash position we ended the quarter with almost 160 billion in cash plus marketable securities. We should 7 billion of new term debt retired 3 billion of maturing debt and reduce commercial paper by 4 billion during the quarter, leaving us with.
Total debt of 100, an 8 billion as a result net cash was 98 billion at the ended the quarter and we continue on our path to reaching I need a net cash neutral position over time.
We returned over 21 billion to shareholders during the September quarter, including almost 18 billion through open market repurchases of 86 million Apple shares and 3.5 billion in dividends and equivalents.
We also retired an additional 7 million shares in the final settlement of our 14th MSR.
As we move ahead into the December quarter I'd like to review our outlook, which includes the type of forward looking information the Nancy referred to at the beginning of the call.
We expect revenue to be between 85.5 and $89.5 billion.
This range includes a negative impact from foreign exchange of over a billion.
We expect gross margin to be between 37 and a half.
And 38.5%.
We expect opex to be between 9.6 and 9.8 billion.
We expect boy I need to be about 200 million.
And we expect the tax rate to be about 16.5%.
Also today, our board of directors has declared a cash dividend of 77 cents per share of common stock.
Payable on November 14, 2019 to shareholders of record.
As of November 11.
2019.
Before we open the call for questions.
Oh side, especially in an announcement to make today.
And then see Paxton, our head of Investor Relations for the last 23 years as decided to retire at the end of December after a wonderful 33 year career at Apple and 93 earnings calls.
Now she has been the face of Apple with analysts and investors over the over a period of incredible growth and success or passion for our company the commitment and dedication to serve our entire investor base and a sense of humor will be miss greatly personally and very grateful for the advice and support you again.
To me during this last six years, we all wish you the very best for the next and exciting phase of your life.
With that let us open the call two questions.
Thank you very much for the King remarks, Luke I, it's obviously been a great privilege for me to engage with so many investors analysts on behalf of Apple over the last couple of decades and of course, it's going to extreme pleasure to work alongside some of your brilliant people here at Atlanta day basis.
Hi, Tom let's get to the business at Hanford, a 93rd time and open the call. The questions. We ask that you limit yourself to two questions.
Operator may we have the first question. Please.
Certainly today that will come from Katy Huberty with Morgan Stanley .
Thank you good afternoon, congratulations on a quarter I found revenue trajectory did improve but it's still declined 9%. So can you talk about the drivers that will allow you to get that category back to growth and if you think that's something that's realistic to expect in fiscal 20.
Okay.
Our Kt, it's Tim we're a very thrilled with what we're seeing in the early going on iPhone 11, iPhone 11 pro and Promacta.
It's it's early but the but the trends look very good so I don't want to make a long range forecast here, we've put the our current thinking in the guidance and you can tell the from the guidance.
We are bullish.
Great and Luca on margins guidance is consistent with September , but theres a lot going on under the covers terrorists could expand in mid December there's some impacts on the TV plus bundle, yes, and they currency and commodity price moves. So can you just talk about the gives and takes.
It may Andy you at the December quarter gross margin guidance.
Yes, a kidney of course.
I, just said I mean at the at the midpoint of the range.
We had essentially a flat sequentially.
On one side, we expect a you know that on deposit side, we expect leavitt as from higher revenue.
On the other side foreign exchange for US continues to be probably the biggest headwind that we got the right now is gonna be negative 70 basis points on a sequential basis also keep in mind that.
During the holiday season, we have a higher mix of products revenue than we have in other quarters and that obviously.
His is dilutive to total company to accompany margin.
On a year over year basis.
We're also about about flat and on one side, we've got better commodity pricing. The environment is better than any was a year ago bought foreign exchange is a negative impact of 120 basis points on it.
On a year over year basis.
Thanks, Katy we have the next question please.
Our next question will be from Mike Olson with Piper Jaffray.
Good afternoon. Thanks for taking my questions. So Wearables category has been strong and it's hard to believe it's now essentially the same sizes Mac.
But related to apples initiatives in health care do you think health related features are a primary driver of Wearables growth and maybe Conversely, how important is arising installed base of wearables and the data that's associated with that to the ongoing innovation within Apple and then I've a follow up.
And Michael it's Tim the Wearables have done extremely well it was acceleration further from.
The previous quarter and so we're thrilled with the the results as to what's driving it. It's the is the totality that's driving a for some people it's about a fitness for some people it's about health for some other people it's about communication in the end for some people, it's all of the above and.
I think the new feature of always on on series five is a game changer form for many of our users and.
In terms of other helped related things that we have going.
We will be a continuing to build out our health records.
Section into the health App.
Really democratizes.
Information about People's Health and so they can easily go from Doctor to Doctor.
We've got the research going that item that I mentioned earlier, there will be more of those through time, and obviously that we've got things that we're not going to talk about just yet.
That we're working on but as I've said before.
My view is there will be a day in the future that we look back and.
Apples greatest contribution a will be to two people sell.
Yeah. Thanks, and then with the strong slate of content in a Apple TV plus can you just talk about the strategy behind giving it away to those that are buying and applicable device versus charging for it and my congrats to Nancy and thank you.
Yeah, it's a it's.
It's a gift who are our users and.
From a business point of view, we'd like to two we're really proud of the content, we'd likely as many people as possible to to view it.
And so this allows us to focus on maximizing subscribers.
Particularly in the early going and so were we feel great about doing that I think it's a bold move in and the price also for those people that are not buying a.
A device in the period of time that we offer this the prices very aggressive as well you think think about the quality of content that you get.
For for 99 units.
It's amazing that is amazing.
Thanks, Mike We have next question please.
That will come from Evercore as I mentioned Darien Amit.
Yes. Thanks, a lot guys. All I guess two questions for me as well the first one Tim if I, if you think about the services business.
You are less than 2 billion away from the targets you had laid out a few years bought but I'm wondering if you think about the growth rates you have hot in the business over the last several years the high teens average I think how much of that do you think was driven by the installed base growing worse as incremental monetization of installed base and do you see that ratio essentially slipping are changing as you go forward.
I think we have opportunities a minute in both the growth of the installed base as Lou mentioned in his comments, we continue to grow across every category a hit new highs in the last quarter and we hit new highs in all of our top 20 markets and so the answer.
Stalled basis, clearly a piece of it.
Getting the the trade in program going and the secondary market moving has been helpful in that as well and of course, the ultimately the thing that that builds the installed base is to to make customers happy and that.
That's our always our top objective is to have satisfied customers. The other thing that is obviously happening is in many areas the.
ARPU is increasing.
And so as there is more offers out there I mean, the the one that is today getting the attention is on the streaming side, but if you look at the number of services had been added over over the years, it's it's significant and people level.
And and so it's really both of those and obviously in finally in getting more people that are.
Enjoying things for free to to elect to a pay for some of the premium services. So it's all that sort of all three of those.
Got it and if I'm just kind of go back to the variables discussion I mean, especially as it think about Apple watch in airports is this central way to think about what the attach rate today to iOS device. Its devices for Apple Watch Arrow pod appears I'm just trying to understand if I think about 900 million plus iPhone installed base, what kinda penetrate.
And do you have at variables and how long could this one maybe as you go forward.
Well, we were not releasing the precise numbers of our wearables. It but is it really nice try and get me to say that [laughter] the.
What we're seeing in terms of new ads on the watch I think Luca May have mentioned this in his comments is about three quarters of the Apple watch buyers are new to Apple watch and so we are still.
In significantly in the build mode, there and in so you don't don't think of the penetration as.
Anywhere near a sort of a mature penetration we got lot lot left there and the air pause just keep hitting new highs and.
And I anticipate that will carry over to this quarter too and we're really proud to to add another product out there for for people wanting noise canceling.
With the air pod program beginning to sell today.
Thank you on it can be at the next question. Please.
That will come from Shannon Cross with Cross research.
Thank you very much first on Nancy just wanted to send you are best wishes well well definitely Miss you I'm sure I agree with Luca you you've been very instrumental over the years.
Hi, My my question, so with regard to China, and I don't know Tim If you can talk more about what you're seeing in China. The trends during the quarter you know the reception specifically there to the ice on any thoughts on you know Hong Kong used to be a big market. There's obviously some turmoil. There. So you provides montana that would.
Helpful. Thank you.
Yeah, we had a.
Very good September Shannon and the the lead of that as a sort of the reception of of iPhone 11.
11, Pro and 11 pro Max and so we feel really good about.
How we've gotten started there as you can tell from the numbers we've.
Significantly improved since the beginning of the year, we've gone from a minus well into the to the Twentys to minus two last quarter and if you looked at betting constant currency, we actually grew one.
And so there's a very slight growth there, we obviously want that to be better oh, but but we feel good about how we're doing I think it's a combination of things that are that have turn things around a on a macro basis I think the trade tension is less and in that.
Clearly looks positive right now with the comments that we've been reading in the process.
Secondly.
The products have been extremely well received their a third the things that we've done from a pricing and monthly payments.
Point of view and trade in getting to trade in program up and running all of these things have.
I have move the dial and so it's sort of the sum of all of that I'd also say, it's not all about I phoned in China. The services area grew double digit a we began to see more gaming approvals in the quarter.
Or I should say some key gaming approvals is not all about quantity, but about which ones.
We saw that also wearables, where wearables are doing so great out of company level, they're doing even better in China, and so lots of lots of positives there.
Thank you and then I'm curious looking maybe you can talk a bit about how you think about operating expense growth a it continues to grow significantly faster than revenue. So I'm just curious as to where you know you're targeting targeting the incremental spend and then you know is our point at least we might just you see some leverage thank you.
Well, you know that Shannon, we've gone through different cycles in some cases, our revenue growth exceeds our opex growth in other cases like fiscal 19 was the other way around but our approach frankly, there's not changing over time, we we want to investing the business.
Our primary investment said during the last few years of being in the R&D space, a because obviously you want to continue to innovate improve the user experience differentiate out products.
We continue to run SGN a tightly obviously if you look at what we've launched during the last few quarters and few years, we launched a lot of new products and now we're launching a lot of new services and when we do that we need to make the adequate investments.
In marketing and advertising to raise the awareness of the new products and new services and that is what Youre seeing for example in the guidance that we provided for the first quarter as we launching.
New services right now and so we making investments both in engineering and your advertising to support the new launches.
Thank you Shannon we have next question please.
That will come from Bernstein Toni Sacconaghi.
Yes. Thank you.
I think this is for Luca and then I have a follow up as well.
If I look at your guidance the midpoint of your guidance for revenues on a sequential basis.
It's up about 36.5%.
Historically fiscal Q4 to Q1 was up 50% or more and even last year given that iPhone is a slower growing product you guided for revenues to be up 45% sequentially.
So given given the enthusiasm about.
The iPhone 11 launch and the new Wearables products and the new services.
Well I guess the question is why is your guidance.
Not stronger for for Q1 on the topline.
And is that sort of a reflection of conservatism given that there's a lot of uncertainty in the world and we certainly saw that last year.
Or are there other forces at work that we should be considering.
Ah Tony Thanks for the question and the guidance that we are providing if you look at it at the midpoint to implies an acceleration of growth from the <unk> you know from the performance that we've seen during the course of fiscal 19.
As I said earlier foreign exchange is clearly a headwind for US right now they said there's about a billion won or negative foreign exchange on eight on a year over year basis.
Ah so that that is something to keep in mind.
We feel very good as Tim said about the I phone the way the new cyclists started and we do expect any improvement in our year over year growth rate on on iPhone Wearables as a very very strong momentum the portfolio services, Oh, So I'd say.
Incredible momentum.
One thing to keep in mind.
As we look at this guidance range is the fact that we also contemplated the comparison.
To the launch of the I pad pro are yet to go for the I pad as well as the new Matchbook Air There was launched during the December quarter last year, so for the ipod them and Mac categories, you need to keep in mind that our launch timing is different on a year over year basis.
Okay. Thank you for that and then if I can follow up.
Just on the bundling of Apple TV plus.
I guess for you Tim.
Yeah. This is really the first time, we've seen a significant bundling.
Of services offering at a hardware offering and I'm wondering if yes, yes, we view this as kind of a strategic advantage of Apple and whether we might see more hardware plus services offerings, a bundled offerings and and ultimately to you do you ever believes that your hardware.
Itself might be offered us as a bundled service.
And maybe while we're on that either you or Luca could could give us that 32nd tutorial on how we should think about the deferred revenue accounting up approximately how much of the 60 Dollarss are you going to be deferring and what's your expectation for attach rate on that thank you.
We have at that accounting issue first.
Obviously, we need to make some assumptions around the take rate of our customers on the on Apple TV, plus right and and we don't want to getting to the details of that because we deal with those assumptions says that's confidential and competitively sensitive, but now you need to keep in mind that we contemplate a number.
Of factors, including the fact that we have family sharing as part of the service. The fact that there are multiple device purchases.
They geographic availability around the world the availability of local content at the beginning of the said these how many people do we have we payment methods on file so we use all these things.
To make.
Assumptions around what the take rate is going to be obviously those assumptions will also be change over time as we get more information on how the qassamits behave.
We haven't launched the service yet you got a set of you know serving our customers tomorrow. So we'll see how it goes by we take into account all these different factors.
On the bundle question, Tony we look at each service and decide whats best to do for it and with TV plus we concluded that a great way to get more people to see the content would be to do this and it would be a good.
Gifts for our users and so that the that's what we're doing.
You can also see that on the other services, we're not doing that and so it's not part of a broader pattern or.
Although I wouldn't want to rollout for the future that we might not see another opportunity at some point in time.
In terms of hardware has.
A service or or as a as a bundle. If you will there are customers today that essentially view the hardware like that.
Because they're on upgrade plans and and so forth and says to some degree that exists today my perspective is that will grow.
In the future to to larger numbers that are Greg disproportionately and one of the things. We're doing is trying to make it simpler and simpler for people to get on these sort of monthly financing kind of things. That's a part of that what we announced with the Apple card.
Earlier in the call and so we're we're cognizant that there are lots of users out there that wallet I sort of a reoccurring payment like that and the receipt of new products on some sort of of a standard kind of basis and we're committed to me.
Like that easier to do then then perhaps it is today.
Thank you Tony can be up the next question. Please.
That will be from Chris Caso with Raymond James.
Yes. Thank you a good afternoon and Nancy our congratulations to you too and we're going to Miss you.
My first question is about about pricing and the effect of some of the lower price points for iPhone 11, as compared to last year and you know looked like margins and on the revenues did well on that.
And also followed some price adjustments you made in emerging markets last year.
And then obviously, we've seen some improvement in China as well. So if you could talk about maybe what that tells us about pricing strategy.
In general and perhaps that that you're willing to take a little more flexible approach to drive some elasticities. If you think that's going to have a positive effect.
Yeah, Chris I think.
I think that the price moves we've made have been smart and well receives and do show a level of elasticities, but the most important thing by far is the product.
And I think we've got the best line up we've ever had and customer response to the product is what the product does for them is really is really incredible and photos on getting from many users around the world or just incredible that people are taking and so I think its product first.
And then fright prices sort of falls out of that and we did decide to to be more aggressive and.
Looking at the results in the early going I think it was the rights Hall in terms of emerging markets Oh, we.
Picked and sort of locally relevant prices in some cases, where the dollar had become a stronger.
We took an exchange rate that would have reflected.
A while back instead of the current exchange rate.
And in other words, we tried to stay as close as we could to a two a local price point that we knew was effective for that particular market and those.
In addition to the U.S. price that has gotten more.
More of a discussion has had been extremely well receive.
Thank you as a follow on perhaps you could talk about a you know the potential for some of the tariffs that are upcoming.
What do you have a view of what potential impact that could have going forward and how Apple is is it is looking to address it will you need to adjust your own pricing.
If in fact, the tariffs are imposed.
We're paying some taros today as you know some that went into effect pre September and some others that went into effect in September .
So we are paying so that's been comprehended.
But in general about my view is very positive in terms of how things are going and that that positive view as is is obviously factored in our guidance as well and.
You know that is just the the tone I think has changed.
Significantly and I have long thought that it was in a post countries best interest to too.
Get to an agreement that.
Maybe initially doesn't solve everything but saw some things of that but that each party may want and get to get to a better placed and where we're at in and I'm hopeful that that's where we're headed.
Thank you Chris could we have the next question. Please.
That will be from Samik Chatterjee from JP Morgan.
Hi, Good afternoon. Thanks for taking my question I, just wanted to start off with.
New services.
Our keen and if you have any insights in terms of what are you seeing for engagement and retention of customers beyond the initial trial period also Hollywood partnerships with Devon oppose progressing there and how does the pipeline looks like and any early projections of what that business longer term might look like.
We're not going to give out projections on it but I would tell you that we were really pleased with the the number of people that entered the trial period people are just coming out of the 30 day trial period in the last.
A few days or a week or so and so it's really too early to tell what the conversion rate will be up but I I feel like we're off to a good start and and the feet. Most important of everything the customer feedback to date has really been incredible and were.
Good for the future of the service.
A quick follow up if I can kinda talk view edibles question with Honda angle.
What are you seeing in them. So I believe consumer behavior in creating variables like applause to add barge and how are you thinking what are your ability to accelerate some of that replacement cycle by driving innovation.
I think we because the watch is relatively young.
We haven't seen enough upgrade cycles to really establish a pattern as yet and as I've mentioned before three out of four customers buying an Apple watch currently or last quarter I should say.
We're buying an Apple watch for the first time and so there's still a very very large new too new to Apple watch in in this regard.
I do think the upgrade market will get larger overtime, but just don't have a current view as to as to.
You know, how often and so forth.
On the air pocket.
Our airports were anxious to see.
The customers for the new air pod pro, but but I would guess that one.
Oh, particularly in the early going we'll be people that have air pods today and want to have a I also have a pair for the times that they need noise cancellation.
[noise]. Thank you Stephanie.
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