Q1 2020 Earnings Call
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Good day, everyone welcome to the Apple incorporated first quarter fiscal year 2020 earnings Conference call. Today's conference is being recorded at this time for opening remarks introductions I'd like to turn the call over to teach us Gowalk senior analyst corporate finance and Investor Relations.
Please go ahead.
Thank you good afternoon, and thank you for joining us.
Speaking first today is Apple CEO , Tim Cook and he'll be followed by CFO look at my Street.
To 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 expenses other income and expenses, Texas capital allocation and future business outlook actual results or trends could differ materially from our four.
Okay.
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 a 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 speaks out of their respective <expletive> .
I'd now like to turn the call over to temper introductory remarks. Thank stages. Good afternoon, and thanks to all of you for joining US we're thrilled to report Apple biggest quarter. However.
New all time records in both revenue and earnings we generated revenue of $91.8 billion, which is above the high end of our guidance range with revenue growth accelerating for the third consecutive quarter.
Geographically, we saw an all time records in the Americas, Europe , and rest of Asia Pacific and saw greater China returned to growth.
A record performance was fueled by iPhone, where December quarter revenue was up 8% year over year and by our fifth consecutive quarter of double digit growth outside of iPhone, including a new all time record for services and another blow up quarter for Wearables.
Our active installed base of devices has now surpassed the 1.5 billion up over 100 million in the last 12 months alone, reaching a new all time high for each of our main product categories in geographic segments.
I don't think is our large and growing installed base, a powerful testament to the satisfaction engagement and loyalty of our customers, but it's also fueling our growth across the board, particularly in services.
Let's take each category one by one.
On iPhone revenue in the December quarter was $56 billion again, that's up 8% over a year ago. Thanks to the exceptional demand for the iPhone 11, I thought a lot of pro and I phone 11 Pro Knox.
In fact.
I thought 11 was our top selling model every week during the December quarter end to bring new models, where our three most popular ourselves.
We had double digit growth in many developed markets, including the U.S. UK, France in Singapore, and also grew double digits in emerging markets led by strong performances in Brazil, mainland, China, India, Thailand and Turkey.
These new models are by far the best I phones, we've ever shot with advanced technologies, an unprecedented leap and battery life to easily get through the day and best in class camera experience.
We have been Wildwood those photos customers have shared and are all do nightmare start a challenge the smart.
Turning to services.
Q1 revenue reached $12.7 billion, an all time record growing 17% over last year.
Once again, we saw double digit growth in all five of our geographic segments and establish new all time records for multiple categories, including cloud services music payment services, and our App store search AD business as well as setting a December quarter record for the App store and Apple care.
2019 was the historic year for services business and I'd like to touch on some highlights.
For the App store 2020 started off strong with customer spending.
New single day record $386 million on new year's day alone a 20% increase over last year.
Apple arcade, our new games subscription service has been backdrop the block with a catalog of over 100, new exclusive games you won't find anywhere else all play a bull across Apple devices with new games and expansions added every month.
Apple TV plot is off to a rousing start and I want to congratulate the entire team at the morning show for their multiple Golden Globe domination, Jennifer Aniston on her screen actors Guild Award and Billy crewed up on his critics Choice Award.
We continue to focus on telling stories that matter like Little America.
Which recently premier to widespread critical acclaim with much more great content still to column.
Apple News now draws over 100 million monthly active users in the U.S. UK, Australia, Canada and provides a curated and personalized experience using on device intelligence to recommend stories.
Apple News plus continues to add new titles offer a subscriber seamless access to the world top publications across Oh, but their devices.
For Apple pay revenue in transactions more than doubled year over year with a run rate exceeding 15 billion transactions a year Apple pay transit support expanded with customers paying for journeys, our transport for London more easily with Apple pay Express transit.
And in spring of 2020, I phone and Apple watch customers will be able to simply tap to ride trains and buses and even more cities, including since then and one job.
We are thrilled with the continued growth an apple card and last month customers began using Apple cart monthly installments, Apple retail and online to purchase new iPhone and pay for them over 24 month.
We see great promise for these recently launched services and we're optimistic about what we've got in the pipeline for each of them.
Now turning to Wearables, we had another incredible quarter setting an all time record in virtually every market we track around the world and this product category is now the size of a fortune 150 company.
Demand for air parts continues to be phenomenal, particularly for our recently launched airports pro our New addition to the airports family. The features active noise cancellation.
Apple watch had a great start to fiscal 2020, setting an all time revenue record during the quarter. It continues to have a profound impact on our customers' lives and it continues to further its reach as over 75% other customers purchasing Apple watch during the quarter were new to Apple watch.
Both air pockets, an Apple watch where must have holiday gifts, helping drive our unprecedented results for the category, even as we say supply constraints for Apple Watch series three.
And airports CRO.
Mac and I pad generated 7.2, and 6 billion at revenue, respectively, and the high level of customer satisfaction and loyalty for both products drove the active installed base.
Both Mac and I tried to new records in all geographic segments.
Well I pad, we saw growth in key emerging markets, like Mexico, India, Turkey, Poland, Thailand, Malaysia, the Philippines, and Vietnam with our current lineup of iPad Pro iPad Air iPad mini and I pad, along with the new I pad.
We get a customer is an unparalleled tablet experience integrated fire integrating hardware software and services in a way that only Apple cat.
This was also a very exciting quarter for the Mac as we launched our most powerful notebook ever.
The 16, etch Mac, but probe as well as macro and pro display XT are the most powerful tools apple as ever put in the hands the pros.
We've already seen a strong response from the pro community from developers photographers and music producers to filmmakers and scientists who rely on the back to create their life that's worth.
We also want to take a moment to congratulate all the Grammy winning and nominated artists. This past weekend, who rely on logic pro 10, and they're back to create incredible music, we all love.
I want to call out and celebrate the exceptional work with our retail and online teams.
This quarter, we opened a beautiful new store in college, Saket, Japan, and exciting things are taking place inside each and every store. Thanks in part to a doubling an iPhone trade ins versus last year, our retail and online stores set an all time record and delivered strong double digit growth than I thought.
We see a very bright future for those for these efforts and we continue to innovate to ensure that everyone who visits at Apple retail location has a great experience.
We'd be get 2020, with our greatest product lineup ever and we are only deepening our commitment to do our part to make the world a better place.
In November we released a completely redesigned everyone can code curriculum to help introduced more elementary and Middle school students the world coding.
The new curriculum include even more resources for teachers, a brand new guide for students and updated Swift coding club materials today millions of students in more than 5000 schools worldwide use every one code curriculum to bring their ideas to lie and develop importance.
Sales, including creativity collaboration and problem solving.
November also saw the launch of our new research out the latest and our ongoing effort to put the future of health in the hands up every user.
Customers in the U.S. kind of Rolling three landmark multiyear health study that we're undertaking with leading academic and research institution.
The Apple Woman's Women's Health study, the Apple Heart and movement study and the Apple during study as in everything we do we built user privacy into the research app from the ground up.
This quarter, we also announced the two and a half a billion dollar plan to help address the housing availability and affording crisis in our home state of California.
We still a great responsibility to help the region, we have always called homestay vibrant and to ensure that it remains a great place for everyone to live and raise a family, including those who do so much to serve the community like firefighters and teachers.
In much more recent news.
We're closely following the development of the Corona virus.
We're donating to groups that are working to contain outbreak we're working closely with our Apple team members that partners in the affected areas in our thoughts are with all of those affected across the region.
As we close the books on a record breaking December quarter, we are already well underway on some new and exciting developments for the future.
Apple strength will always be its boundless creativity and innovation and this year will be no different but for now for more details on the result, I'd like to turn the call over to Luca. Thank you Tim Good afternoon, everyone.
Our business and financial performance in the December quarter wed exceptional as we said new all time records for revenue net income and earnings per share revenue for the quarter was 91.8 billion up seven and a half billion or 9% from a year ago. In spite of a 1 billion dollar headwind.
From foreign exchange.
Graphically, we establish all the time revenue record in many major developed and emerging markets, including among others. The U.S., Canada, Mexico, Brazil, the UK, Germany, France, Italy, Spain, Poland, Thailand, Malaysia and Vietnam.
Products revenue was 79.1 billion up 8% I I phone returned to growth and we had incredibly strong results in Wearables, where we set all time records for both Apple watch and airports.
Services revenue grew 17% to our new all time record $12.7 billion with double digit growth in every geographic segment and new all time records across our portfolio.
Company gross margin was 38.4%.
40 basis points sequentially.
Through them by leverage from higher revenue in spite of a negative 60 basis point impact from foreign exchange.
Products gross margin was 34.2% up 260 basis points sequentially, thanks to leverage and favorable mix services gross margin was 64.4% up 30 basis points sequentially driven by favorable mix.
Our reported tax rate for the quarter was 14.2%.
Before discrete items the rate was 16.5% exactly in line with our guidance a favorable onetime items impacted the rate by 230 basis points.
Net income was an all time record a $22.2 billion up 2.3 billion or 11% over last year.
And with that as soon as source and all time record at $4.99 up 19% and operating cash flow wasn't very strong $30.5 billion and improvement of 3.8 billion over a year ago.
Let me get into more detail for each of our revenue categories.
Hi from revenue of 56 billion grew 8% year over year as we saw great customer response to the launch of our new West I phones, we set all time revenue records in several countries, including the U.S., Mexico, the UK, France, Spain, Poland, Thailand, Malaysia and Vietnam.
Our active installed base of iPhone has reached an all time high and is growing in each of our geographic segments in the U.S. The latest survey of consumers from four or five one research indicates iPhone customer satisfaction of 98%.
For iPhone 11, 11 pro and 11 Promacta combined.
This does buyers planning to purchase smartphones in the next quarter, 84% plans to purchase I phones.
Turning to services, we've had an all time revenue record of 12.7 billion with double digit growth in all of our five geographic segments a stay mentioned.
We establish new all time records for Apple music Cloud services payment services, and our App store surcharge business and December quarter Records for the absolute an apple can.
Well on our way to accomplishing our goal of doubling our fiscal year 16 services revenue.
During 2020, we've actually already reached that go on a run rate basis, we that he's out so the December quarter.
Got somebody 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.
We paid accounts growing double digits in all of our geographic segments. We now have over 418 million paid subscriptions across the services on our platform up 120 million from a year ago and at this point, we expect to hit our goal of surpassing that 500 million mark or.
Already during the March quarter.
Given the tremendous momentum we had experiencing across our services offerings, we're increasing our target for paid subscriptions and aim to reach 600 million before the end of calendar 2020.
Perhaps the revenue grew strong double digits, thanks to robust customer demand for both in App purchases and subscriptions.
What third party subscription business grew across multiple categories and increased almost 40% year over year.
Our first price subscription services also continued to perform extremely well.
Up on music set an all time revenue record offering a catalog of over 60 million songs for our customers Icloud also generate at an all time revenue record growing very strong double digits white offering our customers a safe secure and seamless experience across all of that devices.
He wants the December quarter record for Apple Cat.
Thanks to strong service agreement attach rates and expanded distribution many of our partners I've come to appreciate the strength of the Apple cab brand and our ability to deliver at the very best service and support in the world that value resonates with both our partners and our customers and we'd be happy to see that quality of experience.
They leave it to more and more of our users.
Next I'd like to talk about Mac and I pad.
Mike revenue was 7.2 billion and I've had revenue of 6 billion.
Both products had a difficult year over year comparison to the due to the launches of my COO care match, many and I've had CRO you ended December quarter, a year ago and the subsequent China Phil.
Despite the tough compare on a demand basis, our performance for both Mac and I pad was around even to last year.
Importantly around half of the customers purchasing Max and I pass around the world during the quarter when immune to that product.
And the African installed base for both Mac and I pad reached end up and new all time high.
The most recent the recent surveys from four or five one research measured a 93% customer satisfaction rating for I thought from consumers and 92% from businesses.
And among both consumers and businesses, we're planning to purchase tablets in the March quarter, 78% fancy purchase I pads.
Wearables home and accessories establish a new all time record with revenue of 10 billion up 37% year over year with very strong double digit performance across all five geographies segments and growth across wearables accessories and home.
We set all time records for Wearables in virtually every market we track events as we experienced some product shortages due to very strong customer demand for both Apple watch and their focus during the quarter.
We also continue to see strong demand for our products in the enterprise market.
I thought with technology solutions enables businesses to do their best work, 100%, a fortune 500 companies in the healthcare sector use apples technology in areas such as patient experience.
Clinical communications and nursing workflows.
We've also seen smaller companies in this sector driving innovation without technology and apps. One example is gos surgical which she was this quarter mailing iOS to more accurately estimate blood loss during childbirth and surgery.
This has clinicians have more complete and timely information on whether a patient needs any intervention, which can impact both clinical outcomes and costs.
Another example is butterfly network, a medical imaging company, which makes a hand I don't have.
That's a sound device that connects to iPhone or I pad, we enable conditions.
To take an ultrasound anywhere at a cost of these dramatically lower than other solutions in the market today.
Let me now turning to our cash positions. We ended the quarter with 207 billion in cash plus marketable securities. We should a 2 billion euro denominated green bond.
Retire $1 billion, so maturing debt and reduce commercial paper by 1 billion during the quarter, leading asked Weve total debt of 108 billion as that he's out net cash was 99 billion at the end of the quarter and we maintain our target of reaching a net cash neutral position over time.
We returned nearly $25 billion to shareholders. During the December quarter, We began a 10 billion accelerated share repurchase program in November resulting in the initial delivery and retirement of 30.4 million shares.
We also repurchased 40 million Apple shares for $10 billion through open market transactions, and we paid 3.5 billion in dividends and equivalents.
As we have done for the last several years, we would share our plans for the next phase of our capital return program. When we report the results for the March quarter.
Finally, as we move ahead into the March quarter I'd like to review our outlook, which includes the types of forward looking information that pages referred to at the beginning of the call.
We expect revenues to be between 63 and second $67 billion.
The wider than usual in revenue range comprehends uncertainty related to the recently unfolding public have situation in China.
We expect gross margin to be between 38 and 39%.
We expect opex to be between 9.6 and $9.7 billion.
We expect all I need to be about 250 million and we expect the tax rate to be about 16 and a half distinct.
Also today, our board of directors has declared a cash dividend.
77 cents per share of common stock payable on February 13, two.
2022 shareholders of record as of February 10, 2020.
With that let's open the call two questions.
Thank you Luca we ask that you limit yourself to two questions. Operator may we have the first cash question. Please.
Yes that will be from Amit Daryanani, then with Evercore.
Thanks, Good afternoon, guys I guess first would be up meal and wearables fairly impressive to see it's already a 10 billion dollar business do you guys can you just touched on the growth that you see on the vegetable side up how much. The growth you think is coming from first time buyers of apples to Apple watch horses folks that seemed to be just upgrading the products at the high because.
She also adoption rates a fairly low you install base. So there should be long run me, but not just understand how you see that good Dol divided between those two buckets.
Yeah committed Tim if you look at the.
Apple.
Our the Wearables as a category with the end the wearable Tom and accessories revenue.
Wearables grew 44%. So it was very strong as you say.
The.
Both Apple watch and airports did very well in terms of collecting new customers.
Apple watch in particular, 75% of the customers are new to the Apple watch and so we're it's still very much a.
Selling to a new customers at this point.
Perfect and I guess Luca you could just touched a gross margins. The March quarter Guide I think implies gross margins are flopped actually up 10 50 basis points. It's wherever you guys you actually got gross margins up in March I think because you have a fairly high seasonal sales deleverage happening what are the offsets that's enabling it looks like a better than.
The guy for gross margins.
Yes, that's right I mean, it's sad about flat sequentially.
And by the way Signets it significantly higher on a year over year basis.
But on a sequential basis, you're right on one side, we've got the loss of leverage from the usual seasonality, but we expect that loss of leverage will be offset by better mix.
And cost savings.
Thank you I'm. It can we have the next question. Please.
I will come from Tom Forte with D.A. Davidson.
Great. Thank you for taking my question. So congrats lots of Apple TV plus I wanted to know internally are your gauging success is it purely on critical acclaim.
Number of consumers that are using the service.
Contribution in service revenue.
That's right. Thank you.
Hi, Tom It's Tim we are primarily measuring ourselves on the number of subscribers as you can tell from the way that we launched the product.
We.
Started with a very aggressive pricing for 99 and in addition to that we have our bundle, whereas if you buy pretty much any device your your.
Getting a year for free and so we're very focused on.
Subscribers that said our the product itself is about storytelling and we think if we do that well then we'll find that there will be some number of those it will also be critically acclaimed and we're seeing that would.
The boarding show, we're seeing that with little America, and and others.
Great and then my second question is I think you indicated that last month, you started offering consumers the ability to use are happy card.
Slide nine flown on an installment basis.
Can you talk about how that's had an impact on your unit sales for high zones.
The retail stores did a fantastic.
Hi, so very strong double digit growth and and I followed from a year over year point of view and one of the factors that enabled the.
Was the.
Getting to a monthly payments on the Apple cart to make it very simple of course, that's a U.S. only at this point.
But the U.S. is very key market for us and so it was it was it was that imported.
Part of it.
Thank you Tom can we have the next question. Please.
I will come from Shannon Cross Cross research.
Thank you very much I want to go back to revisit China can can you talk about what you're seeing in the region. What you worsening in the region prior to the health crisis, and then can you also update us but in terms of your manufacturing strategy dual sourcing geographic diversification, even within the region.
We have some ideas of how does this will be managed Ah. Thank you.
Yeah. Thanks, Shannon in terms of China. The results for last quarter, and then I'll, then I'll get into the current of ours.
Okay for the results for last quarter, we had double digit growth for iPhone in mainland China.
So that was.
An important change from where we had been running.
We also had double digit growth in services in mainland China, and we had extremely strong double digit on wearables.
And and so really the word a number of different.
Factors in terms of the things that customers are responding to I phone 11 is doing particularly well there the product has been very well received with its battery life and the cameras is unbelievable.
We also as you probably know have circled trade in programs going and financing programs. These have also been well received and so it's sort of the sum of of all of this and we're attracting quite the.
Quite a large percentage of new customers on on products like the Mac three quarters of the customers buying back.
In China or new.
I had nearly two thirds of their customers buying I pad or new so it was a terrific quarter, we had three at the top for selling smartphones and urban China. According to two kantar.
In terms of the Corona bars.
As I mentioned earlier.
First and foremost our thoughts where there are with all of those that are affected across the region and as I'd mentioned were donating to groups that are working to contain the outbreak.
Also working very closely with our team and our partners in the affected areas and we have.
Limited travel to two business critical situations as of last week.
The situation is emerging and we're still getting lots of data points and monitoring it very closely.
As Luca had mentioned we have a wider than usual revenue range for the second quarter due to the greater uncertainty.
I'll talk about supply chain and customer demand some to give you some color.
With respect to the supply chain, we do have some suppliers in the area.
All of the suppliers there are alternate sources and we're obviously working on mitigation plans to make up in a expected production loss.
We factor or best thinking in the guidance that we've provided you.
With respect to supply sources that are outside the EU on area.
In fact is less clear at this time the reopening of those factories. After Chinese new year has been moved from the end to this month to February 10th depending upon the supplier location and we've attempted to account for this delayed start up through our larger ranges of outcomes that that.
Look I mentioned earlier.
With respect to customer demand and sales.
We've currently closed one of our retail stores at a number of channel partners have also closed their storefronts.
Many of the stores that remain open have also reduced operating hours.
We're taking additional precautions and frequently did cleaning our stores as well as conducting temperature checks for employees.
While our sales within the worldwide area itself or small.
Retail traffic has also been impacted outside of this area across the country in the last few days.
And again, we have attempted to account for this and our in our guidance range that we provided to you.
I hope that.
Got it gives you some color.
Yeah that was really helpful. Luca maybe if you could just touch on from a gross margin perspective, the commodity pricing environment and availability, obviously, there's been some movement on on DRAM and NAND. So if you can talk about you know, how you're thinking about inventory levels and managing that going forward. Thank you.
Yes, as I said earlier to the question around that the gross margin guidance for that for the March quarter, we are seeing and benign commodity environment.
Most commodities that have been declining during December quarter, and we expect the same to happen in the March quarter, and as always and as you probably know.
We look at the way these prices move and at times, when we feel it's appropriate.
By certain commodities in advance and so we we continue that practice as we go through the year.
Thank you Shannon can we have the next question. Please.
I will come from Katy Huberty with Morgan Stanley .
Thank you. Good afternoon, Okay can you address the modest slowdown in services growth this quarter, and 17% versus 18% and in September which services categories accelerated versus where did you see some deceleration undergrads.
And it could you let me make a couple of comments he had a 17% during.
The December quarter, we look at it against Oh were fiscal year 19 growth rate, which was 16%. So we feel very good about a that he's out for the December quarter, as Tim and I mentioned during our prepared remarks, he was a very broad.
These growth because we grew double digits in services across all the five geographies, we said all time records.
For many many categories and music cloud search ads payments or this is December records for the App store in an Apple care.
If you remember we had said two goals for I would have seen the into services.
Segment a first.
Just had a go to double our fiscal 16 revenue during 2020 and when we look at it on a run rate basis, we've already achieved that go with that he's out. So the December quarter. We also set a go to pass 500 million paid subscriptions during 2020.
On T. and given that we had already it for 80 at the end of December we expect to pass that Mark.
During the March quarter and it. So now we are setting and your target for our Hsas are paid subscriptions and so we're now are aiming to reach 600 million before the end of calendar.
2020, so we feel that it services business is going incredibly well of course, we have launched new services. Maybe recently for example, Apple TV blasts or just launching in November and so while these services.
It did not have him if he does impact in our December quarter results, we expect that overtime.
Besides contributing to the growth on the services business, but we feel very happy with the 17%.
Thank you for that 10 is that follow a follow up at some point in the future Apple will launch a fiveg I sound, how big of a demand driver do you view fiveg capability in a hand sad and what's your view as to what the killer App club be cannot consumer perspective.
Yeah, we'll comment on future products, and so I'll try to sidestepped the with respect to five G. I think its and we're in the early innings of its deployment on a global basis.
We obviously couldn't be prouder of our line up and as and our are very excited about our pipeline as well and wouldn't try to our position for anybody.
Thanks, Katy can we have the next question please.
Well hear from Cowen Mcneeley with Jefferies.
Hi, Thanks, a lot. So we're seeing side, we're seeing some signs of new spectrum being deployed four five you deployments and even additional fourg capacity and it's already having a positive impact for handset upgrades to use that new capacity.
Do you get a sense that wireless carriers are getting more incentivized to upgrade handsets to lever did to get leverage of these new network investments how much might this be helping in do you think it'll continue to accelerate.
I think that we've had some great partners are not only in the U.S., but also around the world bed.
Oh, It will really helpful. This quarter as a as partners and so I think that probably a part of that is the level of investments they haven't.
And that are part of it is probably making sure that those customers stick with them.
In a a environment, where there's a lot of.
Trading back and forth.
So I.
I'm optimistic that it will continue.
Okay, Great and then the comment that you made about capacity under Wearables division with their pods pro and Apple Watch Threed, what should we think about the timeline of when those capacity constraints might be alleviate and well they come from from capacity additions or the other than the natural.
Work out of of of kind of unit shipments and something on the demand side.
I'm hopeful that the series three will come into the balance during this quarter.
On Air quotes pro I don't have a estimate for that.
Or you I I, just can't predict where at this point.
Where we seem to be fairly substantially off there and we're working very hard to put into additional capacity.
Thanks, Kyle can we have the next question please.
Yes, Wamsi Mohan Bank of America.
Hi, Yes. Thank you Tim Apple has a very valuable installed base. A few years can you see a future where apple can become larger and the advertising market as you build out TV blossom, given you could hardly any position and ability to drive targeted ads to users without compromising on privacy.
Oh.
Oh I think its a.
I think the it is possible to have advertising straightforward banner that does it.
Encroach on People's privacy, I wouldn't want to.
The conjecture about us in that business I think for the.
For the TV plus business, we feel strongly that what that customer wants isn't as worried product. So.
It's not our at burden to ads is what we what we believe that a customer wall.
Okay. Thank you and loop.
Can you just clarify if the services revenue this quarter had any impact on deferrals associated with TV Bluff at all and opinion help us maybe size the impact of the amortization of the content cost associated with TV plus as you think about next couple of years. Thank you.
Yeah.
I'm sorry, Yes of course, we launched the service on so that was a and a very small contribution to revenue from the deferral and there was also contribution to revenue from the people their subscribers that actually paying for the service when new.
Think about what goes into the Apple TV plus revenue at this point that our two components this paid subscribers.
I've been accustomed to pay for the service and we recognize revenue over their subscription period.
And then we got the when we called the Apple TV Plas bundled subscribers decide to customers that buy and eligible hardware device and redeemed the offer for a three year of TV blast services, we deferred revenue for this offer based on three items that first when is the value of this.
Service that is being provided the one year of Apple TV plot.
Second one is that a number of customers that are eligible for the offer and the third line because our estimate of do you expect a number of customers that we redeem the offer so you need to keep in mind that from our total.
Eligible device sales you need to make a number of reductions for families sharing for multiple device purchases and for geographic availability.
Also the take rate.
And also be impacted by the availability or local content and we also require a payment method on five so these actually met his review quarterly and get to update and based on actual trends of the offer.
So these same puts provide us with the amount of revenue that we deferred for each device say device sales that Dan gets recognized over the one year period that the TV pest services is provided and so when you take the combination of pay subscribers and bond of subscribers.
You got the Apple TV class revenue of course, because we launched a service very recently the amount of revenue that we recognized during the quarter was was immaterial to not theater tool I worry stuff.
With regard to the cost of the.
Of the surface up that are beginning to content Oh, we essentially as we as we incurred these costs we've been put them on the balance sheet and then we amortize them over certain period of time.
Depending on the type of content that we produce.
Thanks Wamsi. It can we have the next question. Please.
Well hear from Cowen and company is Krish Sankar.
Hi, Thanks for taking my question and congrats on the grid because of I'm glad to question first one theme I just wanted to pick your brain a little bit on the overall smartphone market. There's agenda view that men plug influence come all they're going to be more extensive due to higher component caused what are the same time. It looks like you know you guys have proven that there was a market for local geography, it's ones like Iceland and.
He how do you see these two different segments within the smartphone market evolving over the next 123 years I'm going at a follow up from Newco.
[noise] again, I want to stay away from commenting about.
Future products that are generally I think it's important when you think about fiveg is to look around the world at the different deployment schedules.
And some of those look.
Very different perhaps then then or what you might be sitting here.
So that's very important.
In terms of the price I would I wouldn't want to comment on the pricing and so I've got out of it out.
Uh huh.
Got to do what he's done and then I'll follow up from Luca you know opex as a percentage of sales from watching it ticked about 15% higher then are you know in new apply a quota is kind of curious how much of that just bought if it is driven by some of your intermodal method purchases or TD bluffton, the opex or how do we think about it on a go forward basis.
Yeah, I think we felt good about our opex pretty soft because they were not the low end of our guidance range, but you know clearly we want to make all the necessary investments in the business.
And.
From in terms of the new services not only for TV blocks, but all the new services that we launched a during 2019. This is a deal where are we making the necessary investments in advertising and marketing and that at a level of investment is reflected in our opex resolve.
And also as you correctly stated a we completed the acquisition of the ink have base band.
Business during the December quarter, and so we had.
We have affected you know that the.
Run rate up the of the expenses related to that business, partially during during the quarter. After the completion of the transaction and you know we eat that is that a very important core technology for the company. So we continue to make all the necessary investments also there there was a third and.
Category of expenses that are affected the December quarter and is the fact that our revenue was very strong and we had certain valuable expenses. For example credit card fees that are associated with that with a higher volume and of course impacted our office reserves.
Thanks, Krish can we have the next question please.
I will be from Mike Olson with Piper Sandler.
How can you thanks for taking the questions. So slightly different take on an earlier question on Wearables and that is what impact do you think wearables is having on driving people into the Apple ecosystem. You mentioned, 75% of watch buyers are new to the Apple watch, but our many of them due to Apple overall I'm sure a lot of existing I phone.
Pad or Mac users are gonna be wearables customers would you like wearables bring people into the ecosystem to buy other devices in the material way.
I think that Michael it's Tim with each Apple product that a customer buys I too.
They get tighter into the ecosystem because they like the that's the reason that they're buying into it.
Like the experience the customer experience.
And so from that point of view.
I think.
Each of our products can drive a another product.
I would think in that case, it's more likely than the I phone comes first but there's no doubt in my mind that there's some people that came into the ecosystem the watch.
Okay, and then I think you recently mentioned that augmented reality will prevail in our entire lives and I'm wondering if you could share your thoughts about how you think it starts to impact our lives most significantly for for example.
The inflection point and they are come from gaming or industrial usage or some other category and in other words wearable the average person kind of for steel that impacted a on their lives in a significant way. Thanks.
I think what when you look at a are today you would see that there are consumer applications. There our enterprise applications that this is the reason I'm. So excited about it is you rarely have a new technology, where business and consumer or both.
Both see it as a key to them and so I I think it's the answer is that's the reason is that I think it's gotta pervade. Your life is because it's going to go across the business.
And your whole life.
And I think these things will happen in parallel.
There are already companies that are deep into the enterprise business that are working on applications for the enterprise and of course, you can see you can go on the stores see thousands of apps that are a our kids enabled at at this time and it would even more coming.
Thank you Mike can we have the next question. Please.
I will come from Raymond James crushed Castle.
Yes. Thank you good afternoon I guess the first question is on gross margins and you spoke about the favorable mix wondering if you could expand on that a little bit and clearly iPhone is doing well within the overall mix that growing year on year, but if you're talking about what's happening to the mix within iPhone is that improving as well and also help in March.
Jim and his or anything else you would point to a with regard to the overall nexsan margins.
Yes, I think that that makes health as quoting Q1, and it's happiness with the guidance for Q2 and as you said some of it is mix of I phones to the customer response for I phone 11, 11, throwing that haven't from Max's being exceptional and.
That clearly I'd have to how a mix I funny 11 laws, our top selling model throughout the quarter every single week deepwater and so certainly better mix within the I phone yet appointed I like to point out is that as we moved from Q1 two Q2.
The proportion of revenue coming from services increases versus the holiday quarter and given the fact that services at accretive to gross margin for the company Oh, we end up getting a better mix from services as well.
Okay. Thank you.
And I guess follow on question with regard to Opex and not you know it had been growing at a faster rate than revenue for I guess largely over the last three years or so can you send us an expectation with regard to win when you get a return on that on that investment I understand there are new investments that are happening now like how should we think about you know.
Financial leverage going forward as a point in time, where the on the Opex spending you know tend to level off and you get some some return on that or is it just a function of faster revenue growth in future.
Well I would start by saying that our.
Uh huh.
Expense revenue ratio is incredibly competitive relative to other companies in our sector or that are yes, when our opex grows faster than our revenue, but we've also had years in the recent past ready the opposite.
As happened we continue to believe that we have a lot of a great opportunities in front of us.
And you know just if you look at you know this past year, we launched many new initiatives for example on the services front, which we want to support would be appropriate level of investment and the only marketing and advertising, but also in R&D.
As I mentioned earlier, we closed the acquisition are being to a span business.
Because we think it's it's a very important strategic core technology for for the company for the company going forward and I think up from there. He's out said you've seen during this quarter and the guidance that we provided.
Doing it for that for the March quarter, I think we were doing a pretty good job balancing you know the level of investments that we are making.
On the expense fraud.
We are never know many times that we get voting control revenue anca, so profitability that that we're getting our our net income for example was up.
11% during the December quarter.
Thank you can we have the next question. Please.
That will come from Samik Chatterjee with JP Morgan.
Hi, Thanks for taking the question Oh, just wanted to kind of asked on the iPhone revenue pool. If if you could see a good filmed groups are based on the velocity a month and you're seeing for the products exiting the quarter little how comfortable are you feeling about sustaining growth in Iceland revenues to be <unk>, when I had to follow.
You know we have a practice of forecasting the current quarter and so we've given you. The the range that we expect to the current quarter and and really don't give a range beyond that.
Okay. So if anything just maybe then follow up in thumps up well, obviously you put on the growth in most of the Regency reports one of the regions that are declining is and so if you can share your thoughts on what action seems to be dead Glutone that segment that geography to cool. That's what are the brought up cranes dead.
The what's probably be headwind, that's kind of limit conclude.
Yeah.
So <unk>, Japan was what's down 10% during the December quarter.
It was primarily due to iPhone performance, which was challenge because there were some regulatory changes that took effect on the first of October were essentially the regulators pickup old or the mobile phone pricing from the two year contracts and the campaign.
The maximum amount of carrier discounts it can can be made.
At the same time I would say, we then at a more difficult macro environment.
I phone did incredibly well during the quarter.
Six a bit top seven selling smartphone models in Japan.
During the December quarter, what I phones. So he was a very strong performance my iPhone in a difficult environment.
Also in Japan Riyadh.
Based strong double digit growth from services.
Stronger than company average and very strong double digit growth in Wearables also stronger than company average. So we feel very good you know Japan is a is that country, where you're starting to we've had great success and the customers are very loyal and engaged and and yes.
You know very strong position there and we should we have a very good momentum.
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