Q3 2021 Apple Inc Earnings Call
Good day and welcome to the Apple Q3, FY 2021earnings conference call. Today's call is being recorded at this time for opening remarks, and introductions I would like to turn the call over to Tejas Gala director Investor Relations and corporate.
Finance. 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 Luca <unk> after that we'll open the call to questions from analysts.
Please note that some of the information you'll hear during our discussion today.
And they will consist of forward looking statements, including without limitation those regarding revenue gross margin operating expenses other income and expenses taxes capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operation.
These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast.
For more information please refer to the risk factors discussed and Apple's most recently filed annual report on form 10-K, and the form 8-K filed with the SEC today, along with the associated press.
Press release, Apple assumes no obligation to update any forward looking statements or information, which speak as of their respective dates and I'd like to now turn the call over to Tim for introductory remarks.
Thanks Tejas good afternoon, everyone today, Apple is reporting a very strong quarter with double digit revenue.
Revenue growth across our product and services categories and in every geographic segment.
We set a new June quarter revenue record of $81.4 billion.
Up 36% from last year and the vast majority of markets. We track grew double digits with especially.
Strong growth in emerging markets, including India, Latin America and Vietnam.
Total retail sales also set a june quarter record and almost all of our retail stores have now opened their doors.
This quarter saw a growing sense of optimism from.
Consumers and the United States and around the World do.
Driving renewed hope for a better future and for all the innovation can make possible.
But as the last 18 months have demonstrated many times before progress made is not progress guaranteed.
And uneven recovery to the pandemic and.
And a delta variance surging and many countries around the world have shown us once again that the road to recovery will be a winding line.
And the midst of that enduring adversity, we are especially humbled that our technology has continued to play a key role and keeping our customers connected.
Just last month, it was great to be back with our teams and customers for the opening of our newest retail store in Los Angeles.
Apple Tower theater.
It was a hopeful reminder of the energy and sense of community shared spaces brain and how appreciative. We all are now of the.
Privilege of talking to 1 another face to face.
As we look forward to more in person interactions and the future, we're doubling down on innovation and doing all we can to help chart, a course to a healthier and more equitable world.
I'll have more to say about our work and those areas a bit.
Iran, but first let's turn to our product and services categories.
For iPhone this quarter saw very strong double digit growth in each geographic segment and we continue to be heartened by our customers' response to the iPhone 12 line up we're only and.
And the early innings of 5 G, but already it's incredible performance and speed have made a significant impact on how people can get the most out of our technology.
Customers Love iPhone 12 for its Super fast 5 G speeds, <unk> Bionic chip and Adobe.
Dolby vision camera never seen before and a phone.
Users continue to rely on iPad and Mac to work learn create and connect IP.
IPad had its highest june quarter, and nearly a decade, while Mac set an all time June quarter record.
We've seen.
Seen a great response to the new imac and iPad pro both powered by the and 1 chips exceptional speed and power efficient performance.
The IMAX remarkable thin design and vibrant colors have made it a favorite for users everywhere.
And the iPad continues to be and incredibly versatile.
It'll tool and our users toolbox, inspiring creativity and connection and keeping us entertained and productive and equal measure.
It was another very strong quarter for Wearables home and accessories, which set a new June quarter record, while helping people find more ways to stay entertained.
And healthy and connected at home and on the go.
And we'll watch remains a go to choice for users to stay on top of their health and reach their fitness goals and our newest accessories are tag and began shipping to and enthusiastic response from customers, making the find my net worth more useful than.
And ever while protecting user privacy.
Turning to services, which set a new all time revenue record as we continue to rollout innovative new features and programming.
We're proud to be the recipients of 35 Emmy nominations, this year, which speaks.
Quality of our programming and and enthusiasm.
Enthusiastic reception from customers and critics alike and.
Apple TV plus users are loving series like mythic quest and anticipating groundbreaking films like coda, which premieres next month.
And of course, Ted last.
<unk> kicked off season to just last week and continues to win over viewers with its heart warming message about the power of community compassion and hope.
We also introduced Apple podcast subscriptions, a global marketplace for users to discover exclusive content.
Net and support their favorite creators.
And we launched spatial audio for Apple music, a cinematic listening experience that promises to change how music fans and listen and musicians create even more immersive layered and beautiful songs.
Last month, we shared many exciting.
Citing new features at Ww DC.
But more powerful than any of them was the incredible showing of developers from all walks of life and around the world.
The new tools, we announced will help developers harnessed cutting edge technologies like augmented reality reached new users and customers.
Customize their experience on the App store or learned to update or an event and app with Swift Apple is powerful and intuitive programming language.
Today's investments and education and coding translate to Tomorrow's small businesses and groundbreaking new apps. The next app the next.
Act of and App economy already creating jobs and opportunity around the world.
In June a new study by the analysis group found that it was another record year for App store developers, whose combined billings and sales increased by 24% to 640.
$43 billion and 2020.
The App economy continues to be and incredible engine and prosperity and opportunity fueled by the seasonal striving and developers to make apps that enrich people's lives.
Much like the developer community, we are diehard optimist.
About technology's potential to help people live happier healthier and more fulfilled lives goals that shine through with powerful new updates coming to iOS iPad.
And <unk> and watch OS this fall.
That begins with innovative new features that help users stay.
Adjusted with 1 another like share play and spatial audio for facetime or disconnect when they need a break like focus which limits distracting notifications when you're winding down for bed are concentrating at work.
And new productivity features make iPad and even more useful tool for multitasking.
Helping users navigate across apps split their screen or used quick note to capture a thought the moment inspiration strikes.
And the health space, our new health sharing feature will make it easier than ever to securely share your health data to share your health data with loved ones.
And that includes new capabilities like walking steadiness, which uses sensors to assess user stability doing everyday tasks and recommends exercises to improve stability and avoid a fall.
And the belief that privacy is a fundamental human right, we shared new feature.
Features and iOS 15 that continue to drive our progress forward from.
From mail privacy protection, which stops and visible pixels and an E mail from tracking your mail activity to App privacy report, which helps users check on the apps they've granted permission to use their personal data.
We also introduced some incredible next generation technologies coming to the accessibility space.
From a system touch, which helps people with limb differences navigate Apple watch to new voiceover capabilities to help blind and low vision users accessibility remains a bedrock principle for.
For us in the simple belief that the best technology for the world should be the best technology for everyone.
But the responsibility to be a force for good and the lives of others extends beyond the technology. We've made so the teachers and students shaping our future.
This quarter as part of our racial equity and Justice initiative, we awarded innovation grants to engineering schools at 4 historically black colleges and universities to expand their coursework scholarships and internship opportunities and hardware engineering and Silicon chip design.
We see education as a great equalizing force and we are more dedicated than ever to supporting the educators advocates and students lighting and the path and leading the way.
Net includes the 350 Swift student challenge winners we recognized if this year's Ww DC.
If you ever need a dose of hope our inspiration I can't say enough about our students scholarship winners whose apps bring so much good into the world from teaching other young people to code to helping volunteers deliver groceries to people at high risk of COVID-19.
Young People's innovations reminders.
Mind us that our collective future is bound up in the next generations passion for solving global challenges.
And of the responsibility, we have to join them and building a better world.
Turning to our own backyard, we're continuing to press forward and our efforts to help bring more affordable.
Housing to the Bay area and across California.
This month, we shared that we've contributed more than $1 billion to help first time homeowners and construct thousands of new affordable housing units across the state.
And we're continuing to stay focused on supporting the global response to the.
Pandemic and delivering the best products and services for people.
Our greatest source of inspiration is it technology itself, but how people use it and their own lives and waste great and small to provide a novel or to read and 1 to care for and ailing patient or see a doctor.
So it should track their heart rate on a on a job or to train for the Olympics.
Every day and I'm grateful for the dedication of our teams to the simple mission of creating technology that improves People's lives and I want to thank everyone at Apple for the purpose and.
Virtual and they bring to that Michigan.
With that I'll hand, it over to Luca for a deeper dive on our performance this quarter.
Thank you Tim good afternoon, everyone.
And we're very pleased to report record June quarter financial results, which reflect the importance of our products and services and.
Passion with lives and our strong underlying operating performance.
Our revenue reached a June quarter record of $81.4 billion and increase of nearly 22 billion or 36% from a year ago.
We grew double digits and each of our product categories.
With an all time record for services and June quarter Records for iPhone, Mac, and Wearables home and accessories.
We also set new June quarter Records in every geographic segment with very strong double digit growth in each 1 of them.
Products revenue was a june quarter record of.
Our cash $3.9 billion up 37% over a year ago.
This level of sales performance combined with the unmatched loyalty of our customers drove our installed base of active devices to a new all time record.
Our services set an all time revenue record of 17.
6 billion up 33% over a year ago.
And with June quarter Records in each geographic segment.
Company gross margin was 43, 3% up 80 basis points from last quarter, driven by cost savings and a higher mix of services, partially offset by seasonal.
<unk> 5 leverage.
Products gross margin was 36% down.
Down 10 basis points sequentially, a seasonal loss of leverage was almost entirely offset by cost savings.
Services gross margin was 69, 8% down 30 basis points sequentially.
And mainly due to a day from mix.
Net income of $21.7 billion diluted earnings per share of $1.30.
And operating cash flow of $21.1 billion, what all June quarter records by a wide margin.
Let me get into more detail for each of our revenue categories.
And our loss iPhone revenues had a june quarter record of $39.6 billion growing 50% year over year and exceeding our own expectations as the iPhone to our family continued to be in very high demand for.
<unk> was consistently strong across the world and we grew very strong double digits in each geographic segment.
Gross June quarter records in most markets we track.
Our active installed base of iphones reached a new all time high thanks to the exceptional loyalty of our customer base and the strength of our ecosystem in the U S. The latest survey of consumers.
From 451 research indicates iPhone customer satisfaction.
Setting and of 97% for the iPhone to our family.
Turning to services as I mentioned, we reached an all time revenue record of $17.5 billion with all time Records for cloud services music video advertising and payment services and June quarter Records for the App store and Apple care.
These facts and your service offerings, Apple TV, plus Apple arcade, Apple News, plus Apple card, Apple fitness, plus as well as the Apple 1 bundle and continuing to scale across users content and features and are contributing to overall services growth.
The key drivers for our services business all continued to move in the right direction.
Our net.
First our installed base of devices reached an all time high across each geographic segment.
The number of both transacting and paid accounts on our digital content stores reached a new all time high during the June quarter in each geographic segment and paid accounts increase.
And it's double digits.
Third based subscriptions continued to show strong growth, we now have more than 700 million paid subscriptions across the services on our platform, which is up more than $150 million from last year and nearly 4 times. The number of paid subscriptions we had only.
4 years ago.
And finally, we are adding new services that we think our customers will love, while also continuing to improve the breadth and quality of our current services offerings. For example, during Ww D. C. In June we previewed our new icloud, plus and Apple wallet features.
And Chris we believe will create a more secure and differentiated customer experience.
Wearables home and accessories grew 36% year over year to $8.8 billion setting New June quarter revenue Records. In every geographic segment, we continued to improve and expand our product offerings and.
Which categories. This quarter, we began shipping our new Apple TV for Kay with a redesigned CRE remote and our brand new air tags and the customer response to both products has been very strong and.
In addition to its outstanding sales performance globally, Apple watch continues to extend its reach.
And the split nearly 75% of the customers purchasing Apple watch during the quarter being new to the product.
For Mac.
Despite supply constraints, we set a june quarter record of $8.2 billion up 16% over last year with June quarter revenue Records in most markets we track around.
And the world. It is remarkable that the last 4 quarters from Mac are being its best full quarters ever.
This exceptional level of sales success has been driven by the very enthusiastic customer response to our new Max powered by the M..1 chip, which we most recently brought to our newly redesigned <unk>.
Imac.
IPad performance was also strong with revenue of $7.4 billion up 12% in spite of significant supply constraints.
During the quarter. We also started shipping our new iPad pro powered by the M..1 chip and customer response has been outstanding.
Both iPad.
And Mac, if they've taken computing to the next level and when you combine their performance over the last 12 months, they're now the size of a fortune 50 business.
Thanks to the best product lineups, we've ever had very high levels of customer satisfaction, and a loyal growing installed base and <unk>.
In fact around half of the.
Customers purchasing Mac and iPad during the quarter were new to that product and in most recent surveys of U S. Consumers from 451 research and customer satisfaction was 92% for Mac and 95% for iPad.
And enterprise our customers are excited about the superior.
Performance battery life, and security that that the new and 1 Max brain.
Massmutual and for example is offering and 1 Macbook pro to all of its employees and equipping all conference rooms with M..1 Mac meanies and preparation for return to work.
And with its incredible performance and affordable entry price.
Macbook Air with them, 1 is gaining rapid adoption among many leading enterprise organizations.
It'll gas.
Today's largest natural gas company, which will soon be using its extensive network to distribute.
Renewable gases is replacing every employee's windows laptop with the new Macbook air powered by Apple and 1 chip to bring the latest technology to its workforce.
And grab southeast Asia's, leading Super App that provides transportation food delivery and digital payment services.
And 1 Macbook character with companywide and 1 Mac deployment.
Yeah.
Let me now turn to our cash position, we ended the quarter with 194 billion and cash plus marketable securities. We retired 3 billion of term debt and increased commercial paper by 3 billion.
Is that leaving us with total debt of 122 billion as a result, net cash was 72 billion at the end of the quarter.
As our business continues to perform at a very high level. We were also able to return 29 billion to shareholders during the June quarter.
This included a $3.8 billion and dividends and equivalents.
And $17.5 billion through open market repurchases of 136 million Apple shares. We also began a $5 billion accelerated share repurchase program and may resulting and the initial delivery every time and of 32 million shares.
As we move ahead into the.
The quarter I'd like to review our outlook, which includes the types of forward looking information that tejas referred to at the beginning of the call.
Given the continued uncertainty around the world and the near term, we're not providing revenue guidance, but we are sharing some directional insight assuming that the COVID-19 related.
<unk> to our business do not worsen from what we are projecting today for the current quarter.
We expect very strong double digit year over year revenue growth during the September quarter.
We expect revenue growth to be lower than our June quarter year over year growth of 36.
And even for 3 reasons.
First we expect the foreign exchange impact on our year over year growth rate to be 3 points less favorable than it was during the June quarter.
Second we expect our services growth rate to return to a more typical level the growth rate during the June.
Percent benefited from a favorable compare a certain services were significantly impacted by the Covid lockdown, so a year ago.
And third with.
We expect supply constraints during the September quarter to be greater than what we experienced here in the June quarter, the constraints will primarily impact iPhone.
Quarter and iPad.
We expect gross margin to be between 41, 5 and 42, 5%.
We expect opex to be between 11, 3 and $11.5 billion.
We expect <unk> to be around zero, and excluding any potential impact from.
IPhone and out to market of minority investments and our tax rate to be around 16%.
Finally today, our board of directors has declared a cash dividend of <unk> 22 cents.
The share of common stock pay.
Payable on August 12, 2021 to shareholders of record as of August 9.
2000.
From the Milan with that let's open the call to questions.
Thank you Luca we ask that you limit yourself to 2 questions.
Operator may we have the first question. Please.
Thank you and first question from cash from comes from Katy Huberty from Morgan Stanley. Please go ahead.
And in 'twenty.
Yeah.
Okay.
Okay. Your line is open please check your mute function.
Yeah.
Take our next question from Chris.
And with Raymond James.
Yes, Thank you and good morning.
And just dig into the commentary on and on.
On guidance, a little bit you know just starting with the.
And the fact that last year, obviously, there was a later launch of iPhone and the wounds.
Typically see and another years could you talk us through that and perhaps some of the other products what may be different as compared to last year.
Yeah.
Well you know as I explained that arch.
First of all first of all you know we are expecting to grow very strong double digits and that's.
I think Chris that the starting point here, we expect you know this.
Very strong level of growth that we've experienced during the course of the year to continue into the September quarter.
And we said that.
The growth rate is going to be below 36% and I've listed 3 factors. The first factor is that the.
And the dollar.
<unk> continues to be favorable on a year over year basis in the sense that it's weekend against most currencies on a year over year basis.
And that benefit is going to be about 3 points less in the September quarter than what we've experienced during the June quarter, because the dollar strengthened against most currencies in recent weeks.
Weeks.
Second I mentioned that the services growth rate that we've experienced in the June quarter, a 33% that's significantly higher than what we've had.
And in recent history.
And that was due to the fact that day.
Total of services categories, namely.
And what advertising business and Apple care.
That were significantly impacted a year ago, because of the Covid lockdowns and and therefore, they had a relatively easy compare and the June quarter and so we don't.
Don't expect that to continue into the into the September quarter, and so we expect to significant growth and services, but not to the level that we've seen in June and then I mentioned that.
The supply constraints that we've seen in the June quarter.
<unk> will be higher.
A copy and into September quarter backing in and you know when we when we talk here 3 months ago. We said that we were expecting supply constraints for the June quarter between 3 and $4 billion to affect primarily iPad and Mac, we were able to mitigate some of those constraints.
June quarter, and so we came in at the number that was slightly below the low end of that range that we quoted at the beginning of the quarter, but we expect that number to be higher for the September quarter, and so when you put all that together again very strong double digit growth for September.
During the day with this caveat that I just mentioned.
Okay.
And thank you and if I could follow up with regard to the supply constraints and do you expect those supply constraints to persist through the December quarter as well.
Got it.
You know what effect will that have on the holiday selling season.
Tim.
In conjunction with that.
And what additional costs are you are you absorbing because of the supply constraints.
Is that having an effect on gross margins or just product cost to generalize you, perhaps pay a little more to get more supply.
Yeah.
Chris It's Tim.
And then.
In terms of the cost we're paying more for freight that I would like to pay.
But component costs continue in the aggregate to decline.
In terms of supply constraints and how long they will last.
And I don't want to predict that today, we're going to take it 1 quarter at a time and and.
And.
As you as you would guess we will do everything we can to mitigate whatever set of circumstances, we're dealt and.
And Chris on the on the cost side as I mentioned during my comments our.
Results for gross margins for the June quarter 43, 3%.
And we really saw some really nice cost savings during the quarter and I think you've seen that we've provided guidance of 41 and a half to 42 and a half for September and she's obviously and.
Level that we are very pleased with.
Right. Thank you.
Thank you Chris Command and the next question. Please.
Thank you we'll take our next question from Jim Suva with Citigroup investment Research. Please go ahead.
Thank you very much and congratulations to you and your global team for great operations during a challenging.
Hum, Tim and Luca I, just have 1 question and either of you or both of you could figure out who's best to answer it but we look at our world a pretty unprecedented whether it be COVID-19. The delta variant, China floods and supply chain components, just wondering for your like R&D and innovation is it being materially.
Clearly impacted by that such where our normal cadence is unfair or is it kind of happening during a slow time of year, where you're able to empower people to work remotely and still have the typical innovations and product launches that you've had historically in the past.
And the company has been incredibly resilient and the employees are are.
Bill.
Really doing.
Double duty.
And I could not be more pleased with the cadence.
And where we're coming out with new things as you can see from the.
Software announcements that we made and at Ww D C and a corresponding launches of the software that we plan on and in the fall and then all of the products that we've been able to bring out over the last 12 to 18 months.
It's amazing.
Uh huh.
And and so I'm I'm I'm very pleased with it.
Thanks, John and thank you we have the next question Gratulation again.
Okay. Thank you.
Thank you we'll take our next question from Shannon Cross with Cross research.
Thank you very much Tim I'm curious what did you learn from this iPhone cycle regarding customer preferences and pricing and maybe you know subscriptions and that and if there's a difference if you could talk about it on a geographic basis. Thanks.
If you look.
And Q3, Shannon, we had strong double digit growth for switchers and for upgrades.
And in fact, it was our largest on great quarter for our Q3 ever.
And and so we feel really really great about.
And our reserve categories.
And as Luka said during the.
Preamble.
And comments.
We are our results are really strong for iPhone around the world.
And so it's been a very very strong cycle and yet were.
Well the penetration on 5 G is obviously still very very low.
And so we feel really good about the future of the iPhone.
Okay, and and maybe if you could talk a bit about China up 58%.
Where are you seeing the gross.
And what are you hearing from customers their houses and actually is 15% is not sustainable, but how sustainable is that strength. Thank you.
It was a it was an incredibly strong quarter.
And quarter revenue record for greater China for us and so where we.
We're very proud of that and.
Yeah.
Relative to the restaurant and we can to serve customers there.
We had a particularly strong response to the <unk> pro and the 12 Pro Max.
And those those results were particularly strong and it but if you look at the balance of our products. We also saw a June.
Doing our records for Wearables home and accessories for Mac and for services. So it was sort of and across the board straw.
Strength, and we're seeing plenty of new customers come to the market for example, Mac and iPad about 2 thirds of the customers who bought.
And the last quarter were new to that product for the Apple watch that number was 85%.
And so.
We could not be happier with the with the with the results.
What was the 85% China or overall.
Just to be clear, 85% was China and I was talking about specifically the numbers I referenced were specifically for China, and then Shannon it's for the world that they watch and 75%.
Alright, great. Thank you so much.
And thanks, Shannon can we have the next question. Please.
Thank you we'll take our next question from Amit <unk> with Evercore.
Please go ahead.
Alright, Thanks, a lot for taking my question I have 2 as well.
And I guess supposed to have Luke I was hoping you could maybe talk a little bit more about the gross margins and maybe the expectations you laid out for September.
I think sequentially and implied down 100 basis points or so and so.
So maybe just thoughts and what are the puts and takes that would be helpful. Because I think historically September tends to be a flattish maybe even up a little bit gross margin number of people.
Yeah, I think I think it's important to go back to the Q3 results right. It's at 43, 3% and.
1 of.
To mention is that in addition to getting really good cost savings on a sequential basis. We also had a very high mix of services as part of the total and particularly with you know advertising doing doing really really well because of the rebound and we saw from.
From the Covid Lockdown.
Thanks for that.
And a year ago, and so as we move forward sequentially, we do expect a different mix and and so that that drives.
The guidance that we provided which again as you know significantly higher than just a year ago for example, a year ago.
No.
And so we were at 38, 2%, so almost 400 basis points of expansion on a year over year basis, right and so I think it's important to take that into account, it's just a different mix.
Got it no absolutely and I don't think anyone expected gross margins to be north of 40. This quickly Peter wholesale.
That is impressive.
If I could follow up on services and you know like I know you've called out the 33% growth. This quarter is a bit of a aberration that compares with easier, but you know and as you look at your services growth rate over the last 4 quarters, let's just say.
What do you think is enabling the truth is it you.
We're able to have Ohio, our pool.
And monetization of your installed base or the installed base and I'm curious and which ones bigger and then over time, how do you think those those 2 components stocked up for you.
It's a combination of multiple factors right. Obviously, the fact that our installed base continues to grow and it sets new all time highs all the time, obviously it gives us a large.
Larger opportunity all the time and.
And second we have more and more people that are engaged in our ecosystem.
Both transacting for free which is a very large number and people that you know and willing to pay for some of the services and that you know that percentage up.
And people that are paying for our services continues to grow nicely I mentioned it grew double digits again this quarter. So that obviously helps.
And on the revenue side and of course, we continue to increase both the quality and the quantity of the services.
During the last few years, we've launched.
A lot of new services from Apple TV, plus fitness class Apple arcade.
News, plus and so and of course, the Apple card and so these are businesses that we are scaling right now and so all of that additional revenue helps and and I think it flows through our growth rates.
As you said you and the last 4 quarters.
We are well into that you know mid Twenty's Rye and so I think it's obviously, a very nice for us to see.
Okay.
Perfect. Thank you.
Thanks, Amit can we have the next question please.
Thank you, we'll hear next from Katy Huberty.
And with Morgan Stanley. Please go ahead.
Thank you good afternoon, and can you hear me okay.
Yes, we can okay. Good. So first question, there's that's a debate and the market around how much Apple benefited from the pandemic, Kevin increase spend in areas like back and App store it but of course you've mentioned.
The past several quarters that there are other areas that were limited by the pandemic and store closures and less foot traffic. When you net out all the puts and takes with your business helped or was it hindered by the pandemic.
Well of course, you know.
Okay.
And we don't have the crystal ball that tells us exactly what these different variables how they impacted our business, we do know that.
On the I would say on the positive side of the ledger, obviously, especially during the periods of extreme Lockdowns and digital services did very.
Kitty because entertainment options were limited and so obviously, our digital services did really really well, obviously with more people working from home more people studying from home, we know that iPad and Mac demand was very very strong on the other side.
We had certain.
Well services like advertising because of the reduced economic activity Apple care, because our stores were closed.
Factors negatively and shirt and products like the iPhone or the watch that are maybe more complex types of sales because of the complexity of the.
Certain of the transaction. They would also affected because so many points of sales were closed all around the world and not only our stores, but also our partner stores right. So we add that dynamic during you know throughout Covid and now some some some of these businesses that rebounding I mentioned and advertising and Apple care.
And.
IPad and Mac, it's difficult for us to gauge because we've been constrained for quite a long period of time and.
And the reality is that maybe the new normal after we exit COVID-19 may be different from the past for example, and maybe this is gonna be hybrid models.
Around work for example, and so it's difficult to tell you on a net basis.
And what that is clearly and this is very fluid because it tends to change to change over time like I said and intangible that we're all looking forward to a Kobe 3 world I think that.
Models had a good for us and for and for the entire you know him and for our customers as well.
And and just a follow up on iPhone and specifically if you look historically after a really strong product cycle with which you've experienced this year with iPhone and 12 iPhone revenues come.
And under pressure because the upgrade rate slows the mix often shifts to the lower end of the portfolio is it fair to assume a similar trend will play out over the next year or if not what do you think is different this time.
Katy it's Tim.
But you know we're not predicting the next cycle, but I would point out a few things.
1 is we have a very large and growing install base and as you know with the iphones passed a bill in active devices earlier this year.
2 we.
Yeah.
Loyal and satisfied customers the customers that we're seeing on the new iphones or this is just amazing and it's jaw dropping.
And geographic a response.
It is pervasive across the world and in the U S. We have.
And have 3 selling models and the U K, we have 4 out of the top 5 and.
And Australia, we have the top 2 in Japan, and we have the top 3 and urban China, we have the top 2 and.
And and so the response from customers all around and had been great.
Obviously the product itself is amazing.
Uh huh.
The 12 lineup with a huge leap that introduced 5 G and had a 14 biotic.
And a number of other fantastic features that customers love.
The next.
I'll have to consider is that we're in the very early innings of 5 G.
If you if you look at up 5 G penetration around the world.
There's only a couple of countries that are in the double digits yeah.
And so.
That's an amazing.
Thing a thing.
9 months or so into this.
And the last thing is we're going to continue to deliver great products, we're going to continue to do what we do about it and integrate hardware software and services together into an amazing experience.
And so those are the things that I.
So if I were coming up with the forecast.
That's great color. Thank you.
Thanks, Katy can we and the next question please.
Thank you we'll take our next question from harsh Kumar with Piper Sandler.
Yeah, Hey, guys first of all congratulations fantastic ex.
Execution, and she was long term and consistency for your results and Tim.
Tim This is actually a perfect timing for this question you talked about your installed base of 1 billion odd units I was curious if you can help us understand how oldest that install base is and the reason that I'm asking. This question is very clearly seen people upgrade to 5 new phones and that's.
That's the case and that continues that could be a larger force.
And most other forces for your revenues continue to grow as people migrate to the 5 day family of flow and so I'm just curious from can shed light on how the upgrades are happening and then also how old that basis.
Yeah, what what I would tell you is.
First of all it's difficult to answer your question precisely.
But what I would tell you that on both switchers enough graders, we did extremely well and Q3, both were were up strong double digits and and the geographic representation.
No.
IPhone a year over year comps were looks extremely well and so we're we're really pleased with it.
I would remind you the billing and don't forget I quoted also was iPhone, where we quoted a number earlier in the year and.
And the January call I believe of 165 billion devices as the total active devices just for just for clarification.
And so the net is.
Very strong switchers very strong up graders, thus upgrade a quarter for June.
And for the June quarter that we've seen.
And we feel really great about the momentum, but at the same time, we recognize that the <unk> penetration is quite low.
Around the world and.
They're very very low and we're at the front weird.
At the front end of those.
Fair enough from my follow up.
Apples, probably 1 of the largest semiconductor companies and the world.
How do you how does the Apple determined what strategic and something that Apple wants to make itself, which is non strategic and also I'm just curious.
As you know there's a lot of Oh, it's public news now the arm and it's getting acquired by and media and I was curious how.
Apple views that it's not something that's beneficial to Apple are.
And not meaningful or negative.
Well I think that that acquisition and has lots of questions that people.
And we're asking and I'll sort of leave that to up to 2 everyone else and it terms of odds and how we decide to make silicon. We we ask ourselves. If we can do something better if we can deliver a better product if we can buy something and the market.
And and it's great and it's as good as what we could do and we're going to buy it.
We will only will only and or where we believe we have.
Ability to do something better and therefore make a better product for the for the user and so the and 1 is a great example.
A handful that we have the ability within our silicon team to deliver a product that we feel is appreciably better than we could buy and.
And so we've taken our great hardware and software expertise and combine those and.
Brought the M..1 out and the response to the and 1 has been unbelievable.
It's powering a Mac sales that are constrained it's powering now iPad.
And which also has constraints on it and and so that's how we look at whether we should enter.
Intra market or not.
Thank you.
Thanks for the question.
Thank you can we and the next question please.
So we will take our next question from Krish <unk> with Cowen and company. Please go ahead.
Yeah, Hi, Thanks for taking my question and congrats.
And how long ago, So first 1 for Luka.
You mentioned the services growth should normalize and the September quarter and then.
I understand the last few quarters services business was strong driven by work from home et cetera. So what is the normalized growth rate from the services business and school to return back to the office and the post Covid World.
That's on the southern I had a follow up.
But I think you know you can go back several quarters and and tried to do a bit of and average and that's what you know and we would you know talking about of course, there's always a bit of variability around around the results right, but certainly we haven't done 33% and in years and so.
That was a bit of an anomaly and I again I explained it's around a couple of the businesses that had a relatively easy compare during the June quarter. So they know all of our services growth.
And it's been for many many quarters and you know strong double digits and and you know we feel confident.
So around that level.
Got it got it and then just a follow up with Tim and Luca.
Tim you mentioned in your prepared comments that in September quarter, there's going to be good and impact on supply constraints on the iPhone and iPad. So I'm kind of curious you know this is the first time and I heard you talk about component shortages impacting the ice.
IPhone can you be more specific is it display drivers and sort of what exactly is the chokepoint and.
The on the supply.
And the majority of constraints, we're seeing are of the variety that I think others are seeing that our I O clock.
Classifieds industry.
Shortage, we do have some shortages.
In addition to that that are aware of the demand.
And it's been so great and so beyond our own expectation that it's difficult to get the entire set of parts.
Within the lead times that the.
We try and get those and so it's.
It's a little bit of that as well.
The as I said before and I think probably maybe with the basis of your question.
The sort of the latest nodes.
Which we use and several of our products have not been as much of an issue.
The legacy nodes are aware of the supply constraints have been.
On this on somewhat.
Yeah.
Thank you Chris can we have the next question. Please.
Thank you we'll hear our next question from David Wong with UBS.
Alright. Thank you guys from the question. So maybe just a point of clarification. So based on the data and the comments about upgrader and switchers being strong as well as emerging markets were relatively strong and the quarter.
What is that specific set of data points strength.
The Ashland portfolio and I guess my question around that is you know when you think about switchers and price points I think last year, you would and launched the S. E. T to really address give you some of the lower price point markets like the emerging markets. So does that mean thinking about the portfolio going forward theres less of a need for a lower price product going forward and.
I mean, you know the current portfolio and and the new cycle going forward would be more high end and nature. As we currently have today and then I have a follow up.
Yeah, David we did we had a incredible.
The quarter for the emerging markets and Q3 with <unk>.
June quarter Records and.
And that co and Brazil and Chile.
And in Turkey, and you use.
<unk>, and Poland, and Czech Republic and.
Obviously and in China, as I talked about before Thailand, Malaysia and.
Vietnam, Cambodia, Indonesia, and I could go on and the name of few more it sounds a little very long lives.
And Mexican so.
Where those where those results are for the entire line of products that we have and keep in mind, we still do have etsy and Milan, we launched a year ago.
But it's still and the line today and and this is sort of our.
Our entry price point and.
And so I'm I'm pleased with how all of them are doing and I I think we need.
Sort of that range of price points to accommodate the.
Types of people that we bought to accommodate and so we put something.
Entry buyer, who really wants to get into and iPhone and then something for the month or pro buyer, who wants the very best iphones and thinking they can buy.
And I think that's all driven by emerging markets is as good as its true and the United States or or other developed markets.
No no that's helpful.
And I appreciate that and so does that mean sort of emerging market buyer that wants to get into the iPhone. You know is looking for a device that has 5 G capability as well you know obviously, we're early innings and a lot of markets or how do we think about that you know the intermediate to longer term in terms of consumer preference for 5 and <unk> in those markets. It's available from an infrastructure perspective.
And most of the markets I right. It is really really really early on and 5 G.
Oh really early and so I, but I think the top and buyer.
As a buying for the future as well because they may hold their phone for 2 years or longer.
Taxes.
And so it's fine G becomes an important part of their buying decision.
Great. Thank you very much.
Yes.
Thank you can we and the next question please.
Thank you we'll take our next question from Ben Bolan with Cleveland Research.
And so I'm funny.
Good evening, everyone and thanks for taking the question.
I wanted to start.
Luca Tim could you walk us through a little bit about how you think Apple 1 bundles are influencing the trajectory of services and the economics.
And.
<unk> second part on services.
I'm curious how you how you think idea Fe is developing and and influencing the trajectory of the advertising business within services.
Yeah.
And in terms of Apple as you know, we're offering Apple 1 because.
And then ex enjoying our subscription services easier than ever before.
Including Apple music, and Apple, TV, plus and Apple arcade and icloud and and.
And more and so we really put the customer at the center of that and.
And have Ah.
And it made recently began to remind people.
About Apple, 1 and and a wave that we probably weighted a few months before before doing that and so I'm very pleased with what we're seeing on Apple 1 right now.
And and things.
A great ramp for the future of services and more importantly, it's a great customer bill.
Because many of our customers like to try out more than 1 of these services and it allows them to do that.
And 1 easy bundle and and subscription service.
It's.
In terms of I'd Esa or the.
Advertising and general I take it your question is about ATT.
And with ATT, we've we've been getting quite a bit of customer.
Reaction positive reaction to.
Being able to make the decision on a transparent basis about whether to be tracked or not.
And.
It seems to be going very well from a user point of view.
Yeah.
Thank you. Thank you can we have the next question. Please.
Thank you we'll take our next question from <unk> Mohan with Bank of America.
Yes. Thank you I have 2 as well Tim.
Luca you noted significant product revenue deleverage, but you have to go product gross margins were roughly flat you know what it cost savings can you maybe talk about.
And whether these are tactic.
Tactical in nature or more structural like vertical integration and that'll continue to drive benefits to product gross margins and and on services side. You noted several times about the strength and and add growth, which is obviously very high margin contributor, but the sequential trajectory on services margins was was flat.
Where some of your assets, there and I've a follow up for Tim.
Yeah.
And on the product side and it talked about cost savings Tim mentioned that you know maybe on the freight side, we've seen some level of cost pressure that is a bit.
And out of the norm at this point and the cycle.
Well everything Nancy for all of the major commodities and components, we continue to see a very typical.
Cycle, and where we're getting good cost savings on a sequential basis and.
And so far it's been very good and as you can tell from the absolute level of gross margins because 1 day.
On the on the product side, we are up more than 600 basis points and a year over year basis. So it is something that you know we've you know we've been able to accomplish and we were able to maintain at least in the near term.
Nothing that was abnormal during the quarter or 1 off in nature.
And it was really structural on the on the services side again up a lot on a year over year basis. So you know the baseline has gone up a lot. The sequential decline as you said he was very very small and as I mentioned several times in the past we have a very large services portfolio with very different and.
And margin profile, and our services and so even a slight change and mix can drive.
Sequential differences and and this was the case this quarter just just a different mix I mentioned and for example that Apple care that's rebounded.
And so and so those you know the relative success.
Access and all of our services and the in the marketplace can drive some some slight changes in gross minus again step back for a second and 69, 8% gross margin with very very very happy with where we are with.
With the services margin trajectory.
Okay, Thanks, Luca and and Tim there was increasing.
And regulatory focus in China in particular on some of the Chinese companies are.
It's not a direct impact of Apple, but how should investors handicap the indirect impact given some of these companies are pretty large contributors to Apple's app store revenues and and also as they are.
Are you seeing any impact at all from from DS and is the limiting of the usage of some of these pops influencing how.
How people are and for either interacting with your devices or or is there any other ancillary impacts that you're seeing thank you.
For the quarter.
And as you can see we grew 58%. So it was a strong quarter and embedded and that was a quarterly record for services, which includes the app store and.
And so we're.
We're seeing strength in China the economy has.
Uh huh.
Really bounce back.
Back there fairly quickly from from Covid.
In terms of the regulatory focus.
And what we're focusing on from our angle is to serve users there and yes.
And.
Try to.
And make sure that theyre very satisfied with the products and the services that were.
That we're showing and what.
Will we work with a lot of different companies to 2 and ensure that and so that's our focus.
Thanks, Tim.
Thank you.
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Members of the press with additional questions can contact Josh Rosenstock at 40886211, and 4 to financial analysts can contact me with additional questions.
At 669227240 to thank you again for joining us.
Thank you that does conclude today's conference. Thank you for your participation.
Okay.
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