Q4 2021 Apple Inc Earnings Call
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Good day and welcome to the Apple Q4 fiscal year 2021 earnings Conference call. Today's call is being recorded at this time for opening remarks, and introductions I would like to turn the call over to Tejas Gala director of Investor Relations and corporate Finance. Please go ahead.
Thank you good afternoon, and thank you for joining us.
Speaking today first is Apple CEO, Tim Cook and he'll be followed by CFO Luca Maestri after that we'll open the call to questions from analysts.
Please note that some of the information you'll hear during our discussion today will consist of forward looking statements, including without limitation those regarding revenue gross margin operating expenses other income and expense taxes capital allocation and future business outlook, including the potential impact of COVID-19.
On the company's business and results of operations. These.
Statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast for more information. Please refer to the risk factors discussed in Apple's Most recently filed annual report on Form 10-K, and the form 8-K filed with the SEC today, along with the associated press release.
Apple assumes no obligation to update any forward looking statements or information, which speak as of their respective dates I'd like to now turn the call over to Tim for introductory remarks. Thanks.
Thanks, Tejas and good afternoon, everyone and thank you for joining the call today are.
A year ago I spoke to you about the atmosphere of uncertainty and which we were living and the way it had come to define our daily experience, both as people and as a company.
Much has changed profoundly.
And while we're still living through unprecedented times, we are encouraged by progress around the world.
I am grateful to our teams who have stayed resolutely focused on our customers and the pursuit of innovation on their behalf. We have aimed to help our customers navigate the world as it is while empowering them to create the world as it can be.
Whether it's public health workers, managing vaccination campaigns on iPhone or students returning to classrooms full of ipads or family staying connected over face time. It is an honor to know that what we make matters and to see that reflected in the world and in our performance.
This fiscal year, we reported $366 billion in revenue, which represents 33% annual growth. We also achieved more than 20% growth across all of our product categories and in every geographic segment and.
Today, Apple is reporting another very strong quarter demand was very robust and we set a new September quarter record of $83 $4 billion.
Up 29% from last year and in line with what we discussed on our last call despite larger than expected supply constraints.
We estimate these constraints had around a $6 billion revenue dollar impact driven primarily by industry wide silicon shortages and COVID-19 related manufacturing disruptions. Even so we set an all time record for Mac and quarterly records for iPhone, iPad Wearables home and accessories.
Representing 30% year over year growth in products are.
Our services business performed better than we expected, where we had an all time record of $18 3 billion and.
And grew 26% year over year.
And we set quarterly records in every geographic segment with strong double digit growth across the board.
During fiscal 2021, we arent nearly one third of our revenue from emerging markets and doubled our business in India and Vietnam.
We are optimistic about the future, especially as we see strong demand for our new products at the end of the September quarter, we introduce our iPhone 13 lineup as well as the Apple Watch series, seven iPad and iPad mini all of which represent significant advances.
The iPhone <unk> and iPhone 13, many alongside the iPhone 13 Pro and pro Macs are setting a new standard with our Superfast performance advanced camera systems longer battery life and brilliant Super retina displays.
Customers are loving the ninth generation iPad, which features a beautifully sharp display and twice the storage of the previous generation as well as the new iPad mini with its ultra portable design and impressive speed and performance.
And we've been thrilled with the reviews that Apple Watch series seven has earned for its larger display faster charging and refined design.
And just last week, we introduced a completely re imagine Macbook pro powered by the extraordinary and one pro and one Max chips.
These are our most powerful notebooks ever with game changing performance and battery life and the world's best notebook display. We think customers are going to love Macbook Pro whether they are editing video and final cut pro or making music and logic pro and so much more there'll be able to do things never before possible on <unk>.
Paul.
We also announced our all new Airpods that feature special audio and industry, leading sound longer battery life and an all new design for the home. We added three new colors to our home pod, many lineup, which offer seamless integration across Apple's products and services, we also announced a new.
And tier to Apple music called Apple Music Boys, which offers subscribers access to the services catalog of 90 million songs all through the power of CRE.
Across the board teams at Apple continued to drive unmatched innovation through the seamlessly integrated hardware software experience, we've long prided ourselves on.
<unk> 15, an iPad. It was 15 have created more ways than ever to stay productive whether it's using focus to avoid distractions are quick note to capture a thought.
Mac OS Monterey offers new ways to connect with friends and family get more done and work fluidly across Apple devices.
And watch OSA has made Apple watch, even more powerful and more ways than ever to stay active and to track your health on the go.
We've never had a more diverse range of services for our customers to choose from and we've been very encouraged by our performance, which reflects growing customer enthusiasm and satisfaction.
In just its first two years Apple TV plus has already proved itself to fans around the world and I want to congratulate the incredible actors writers storytellers producers and everyone else who is behind the scenes work has made that success possible.
This quarter, Apple TV, plus 111, emmy's, including the award for Outstanding Comedy series for Ted last so that.
That show has continued to bring light and laughter to fans all over the world with its boundless optimism and beloved cast of characters.
We couldnt be more proud of our entire lineup of content from the gripping second seasons of the morning show and truth be told to our newest programs swagger, which is out tomorrow. The response has been incredible.
This quarter also saw a major updates to fitness plus including the addition of new activities like meditation employees and the announcement of group workouts, a feature that brings fitness and friends together.
We also shared that fitness plus will soon be available in 15, new countries, bringing workouts for every age and skill level to millions more people around the world.
And those are just two of the services our customers are loving this quarter Apple card one of J D Power awards for customer satisfaction in its very first year of eligibility.
The App store continues to help people find the apps they depend on to stay productive creative and entertained.
And on Apple News, we launched a new partner program that expands Apple support for journalism, while creating an even better business opportunity for publishers.
And we continue to support our customers around the world. We're glad to report we've opened several new Apple stores. This quarter, we opened a beautiful store in Shanghai, which is our first store in the Hunan Province of China. We also just opened our third store in Istanbul.
And we've recently added a store in the Bronx, which means we are now in all five boroughs of New York City.
All of our stores are now open worldwide and had been for seven weeks as we enter our busiest time of the year I, particularly want to share my gratitude for our retail teams customers have never relied on our products more and our retail teams have truly answered the call we meet our customers where they are with many ways to shop.
<unk> through our online in retail stores and can help them choose the best product for them and get it up and running.
We are also excited about our education initiatives. This month, we introduced the everyone can code early learners program offering free resources, which helps students in elementary school learn coding.
We see education, not only as a fundamental good in its own right, but it is a great equalizing force a world where all people can access a quality education isn't just a smarter world. It's a more equitable one.
That desire to create a more just and equitable world is the guiding principle behind our racial equity and Justice initiative.
This quarter Apple shared plans to expand our $100 million of investment by an additional $30 million.
Those funds will be used in a number of ways, including the creation of a new global Hispanic serving institutions equity and innovation hub.
The hub will dramatically expand the technology and resources for students under stem deals.
Those programs join our ever expanding work with historically black colleges and universities, including the now 45 community coding centers and regional hubs, serving underrepresented communities across the United States.
This month, we were also happy to welcome to the inaugural class of developers and entrepreneurs to the Apple developer Academy in Detroit.
<unk> is Apple's first in the United States and is designed to help prepare students for jobs in the thriving iOS app economy, which supports more than $2 1 million jobs across all 50 states.
In August we shared our impact accelerators first cohort apply latinx and indigenous owned businesses, whose pioneering work in green technology and clean energy serves many of the communities most impacted by climate change.
More broadly we are already carbon neutral as a company and this quarter, we made new strides toward reaching our goal of carbon neutrality across our entire supply chain and the lifecycle of our devices by 2030.
We've made significant product advances in this area iPad and iPad mini now come with 100% recycled aluminum enclosure.
The antenna on iPhone 13 is made up of up cycle plastic water bottles, which marks an industry first.
And as our customers are seeing when they purchase iPhone 13, we've redesigned the packaging to eliminate the outer plastic wrap which will allow us to avoid using 600 metric tons of plastic.
This brings us closer to removing all plastic in our packaging by 2025.
We've also made good progress toward our goal to one day make our products without taking anything from the Earth with Apple Watch series Seven for example, 99% of the rare Earth elements, we use are recycled.
Ahead of Cop 26, I'm also pleased to report that we have more than doubled the number of our suppliers, who have committed to becoming carbon neutral by 2030.
We're very encouraged to see the growth in this area and we will continue to drive those changes in the supply chain in the months and years to come.
We've never viewed our environmental work its a side project teams across Apple are pushing this work forward in the same spirit of innovation, we bring to our products and services. We are determined to be a ripple in the PON that drives a far greater change from the pandemic to climate change to an equity in <unk>.
Justice global challenges won't abide solitary solutions, and we feel a deep sense of responsibility to hell.
We are incredibly proud of the product lineup, we have going into the holiday season, and we are encouraged by the customer response, we've seen.
And while we cannot know exactly which path the pandemic will take the world down in the months to come we feel quite confident that this new year will be driven by the values that guide us and by the innovation that defines us with that I'll hand, it over to Luca for a deeper dive on our performance this quarter.
Thank you Tim good afternoon, everyone.
We are pleased to report very strong financial results for the September quarter, capping a record setting fiscal year 2021.
We set a September quarter revenue record of $83 4 billion, an increase of nearly $19 billion or 29% from a year ago, despite larger than expected supply constrains.
We also reached new Q4 records in every geographic segment with strong double digit growth in each one of them.
And it was a record September quarter for both products and services on the products side revenue was $65 1 billion up 30% over a year ago as we experienced better than expected demand for our products. Despite supply constraints that we estimated at around six.
Billion.
We grew in each of our product categories with an all time record for Mac.
September quarter record for iPhone for iPad and for Wearables home and accessories. This level of safety performance.
With the a match loyalty of our customers and the strength of our ecosystem.
Drove our installed base of active devices to a new all time record.
Our services set an all time revenue record of $18 3 billion up 26% over a year ago with September quarter Records in every geographic segment and in every services category.
Company gross margin was 42, 2% down 110 basis points from last quarter due to higher costs and a different mix of products, partially offset by leverage.
<unk> gross margin was 34, 3% down 170 basis points sequentially as higher cost structures were partially offset by leverage and mix services gross margin was 75%.
70 basis points sequentially, mainly due to a different mix.
Net income of $20 6 billion and diluted earnings per share of $1.24.
Both grew over 60% year over year and were September quarter record.
Let me get into more detail.
Each of our revenue categories.
IPhone revenue grew 47% year over year and set a September quarter record of $38 9 billion. Despite supply constraints as customer demand was very strong.
The iPhone <unk> family continued to perform very well and we are seeing enthusiastic customer response to the launch of our iPhone 13 family.
We also grew double digits in each geographic segment setting September quarter records in both developed and emerging markets.
The latest survey of U S. Consumers from 451 research indicates iPhone customer satisfaction of 98% for iPhone and our active installed base of iphones reached a new all time high.
For Mac, we set an all time revenue record of $9 2 billion. Despite supply constraints driven by strong demand for our <unk> powered Macbook Air in fact, our last five quarters for Mac have been the best five quarters ever for the category.
<unk> performance was also strong with a September quarter revenue record of $8 3 billion up 21%.
In spite of significant supply constraints as customer demand for for the iPad Pro also powered by M. One was very strong.
For both Mac and iPad, we continue to see a combination of high levels of customer satisfaction and first time buyers.
Around half of the customers purchasing Mac and iPad during the quarter were new to that product and in the most recent surveys of U S. Consumers from 451 research customer satisfaction was 97% for both Mac and iPad.
Our continued investment in iPad and Mac is taking computing to the next level, we have redesigned and reengineered both products to provide customers an unmatched experience, which resulted in record fiscal years for both categories. We are carrying this momentum also in the enterprise market.
For example.
SAP is already deployed Max two tenths of thousands of their employees to date following the launch of our new M. One Macbook Pro last week.
SAP is planning to add it to the growing list of N. One Mac offerings available to their global.
Workforce.
Another example is France's National Railway company, SNCF, which equips all train drivers with ipads to manage their entire daily workflow and train operations.
To lower energy and maintenance cost in fact, the ipads have been so where do we see the 90% of the drivers choose to purchase them for personal use at the end of the corporate device refresh cycle.
Next wearables home and accessories set a new September quarter record of $8 8 billion, we continue to improve and expand our product offerings in this category, which we believe improve the overall customer experience and showcase the integration between our products and services Apple watch.
Airpods and Homefield, many are powerful devices in their own right.
Paired with our other products software and services they create unique experiences like switching audio seamlessly between devices on your airports.
Turning to services as I mentioned, we reached an all time revenue record of $18 3 billion with all time records for cloud services.
<unk> video advertising applecare and payment services and our September quarter record for the App store.
Our continued investment and strong execution in services.
<unk> has delivered a record $68 billion in revenue during fiscal 2021, nearly tripling this category in six years.
These impressive results reflect the positive momentum we are seeing on many fronts.
First our installed base continues to grow and reached an all time high across each geographic segment next we continue to see increased customer engagement with our services. The number of paid accounts on our digital content stores grew double digits and reached a new all time high during the September quarter in.
Each geographic segment.
So paid subscriptions continued to show very strong growth.
We now have more than 745 million paid subscriptions across the services on our platform, which is up more than $160 million from last year and nearly five times. The number of paid subscriptions, we had less than five years ago.
And finally as Tim mentioned earlier, we're adding new services that we think our customers will love and.
And we continue to improve the breadth and quality of our current services offerings.
'twenty one 'twenty, one was not only a big year for services, but for our entire company. During the past 12 months, we grew our business by 33% or.
$91 billion, reaching nearly $366 billion of revenue with record level performance across the board.
EBIT product category and every geographic segment set a new annual revenue record and was up at least 20%.
For fiscal 2020.
Let me now turn to our cash position, we ended the quarter with 191 billion in cash plus marketable securities. We issued $6 5 billion of new term debt retired $1 3 billion of term debt and decreased commercial paper by 2 billion, leaving us with total debt of 100.
<unk> hundred 25 billion as a result, net cash was 66 billion at the end of the quarter as we continue to make progress towards our goal of net cash neutral over time.
As our business continues to generate very strong cash flow. We were also able to return $24 billion to shareholders. During the September quarter. This included $3 6 billion in dividends and equivalents and $20 billion through open market repurchases of 137 million Apple shares. We also retired an additional five.
5 million shares in the final settlement of our 17th ASR.
As we move ahead into the December 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.
Given the continued uncertainty around the world in the near term, we're not providing revenue guidance, but we are sharing some directional insights.
Based on the assumption that the COVID-19 related impacts to our business do not worsen from what we are projecting today for the current quarter.
As we mentioned earlier during the September quarter supply constraints impacted our revenue by around $6 billion.
We estimate the impact from supply constraints will be larger during the December quarter. Despite this challenge we are seeing high demand for our products and expect to achieve very solid year over year revenue growth and to set a new revenue record during this December quarter.
We expect revenue for each product category to grow on a year over year basis, except for iPad, which we expect to decline year over year due to supply constraints for services, we expect our growth rate to decelerate from the September quarter, but to remain strong.
We expect gross margin to be between 41, five and 42, 5%.
We expect opex to be between $12, four and $12 6 billion.
We expect <unk> to be around negative $50 million, excluding any potential impact from the mark 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 per share of common stock payable on November 11, 2021 to shareholders of record as of November eight 2021 with that let's open the call to questions.
Thank you Luca we ask that you limit yourself to two questions.
Operator may we have the first question. Please.
Thank you first question comes from Shannon Cross from Cross research.
Thank you very much.
Tim I'm wondering can you talk a bit more about specific supply chain issues, you saw and how <unk> seen improvements I think during the current quarter and you know how we should think about what products do you expect to see most impacted going forward just any more color you can give us on what's going on out there because clearly this is hitting everyone.
Sure.
If you look at Q4 for a moment.
We had about $6 billion.
Supply constraints and it affected the iPhone.
IPad in the back.
We had there were two causes for.
For Q4, one was the chip shortages that you've heard a lot about from many different companies through the industry.
And the second was COVID-19 related manufacturing disruptions in southeast Asia.
The second of the Covid disruptions have improved.
Materially across October to where we currently are and so forth this quarter.
We think that the primary cause of supply chain.
Related shortages will will be the chip shortage.
It will affect.
It is affecting I should say pretty much most of our products currently.
And but but from a demand point of view.
Demand is very robust and so part of this is.
Demand also is very strong, but we believe that by the time. We finished the quarter is that the constraints will be larger than the two 6 billion that we experienced in Q4.
Okay, great. So you sort of pushed forward in the next quarter as well.
Can you get to a different question because I'm curious are you starting to sell more and more things on a ratable basis.
And how are you thinking about that I mean, you have the new Max and that we keep seeing you know you can buy for a monthly charge and that how do you think that that's driving sales and how should we think about you know percent maybe of the portfolio that is now available.
I don't know if you want to tell us how much revenue is now under under a recurring nature, but it's it.
It definitely seems as you're shifting more and more to maybe sort of bet, a bundled sale or or offering for me from a consumer standpoint, where you just pay one price every every month and you get all of your Apple devices and Apple services. Thank you.
Yes, the first product Shannon that really sold on a monthly basis with XI fall.
And that began to happen.
In the U S. As an example, shortly after the the subsidy kind of world changed.
Markedly and so.
Would say that predominantly.
The mode of buying an iPhone in the United States is on a monthly.
Kind of plan today.
For the balance of the product still the.
Most popular would be buying them outright, but we are seeing more and more demand for monthly payments.
And so and so we want to get the customer what they want and so you will see us do more and more things like that that we will meet the customer where.
<unk> provides the price.
Want in a way that they want to pay for it.
I don't know the percentage.
Our products that are sold that way today, but it is increasing.
Great. Thank you.
Yes.
Thanks, Shannon can we have the next question please.
We will hear next from Amit <unk> with Evercore.
Yeah.
Perfect. Thanks, a lot and good afternoon, everyone.
I have two as well.
So when I think about the supply chain headwinds that you're talking about 6 billion in September getting bigger in December.
Yeah.
Love to understand how do you get comfort that this is really demanded getting good forward versus potentially getting distorted going somewhere else.
If you think about the supply chain bottlenecks.
You will have to see all you managed a lot of this stuff.
Feel comfortable this lot of peaks in December and believe me, it's from there or what does that trajectory look like for improvement.
Yes, what I feel comfortable on is I feel like we've made great progress on the Covid related disruptions and that happened across the months of October and we're in a materially better position today.
It is difficult to predict COVID-19, and so I'm not going to predict where it goes but I can just tell you that as of today, we're in a materially better position than we are.
In September in the first several weeks of October in terms of the chip shortage.
Shortages happening on legacy nodes.
Merrily.
By leading edge nodes, and we're not having issues on leading edge nodes, but on legacy nodes, we compete with many different companies for supply.
And it's difficult to forecast.
When those things will balance because you'd have to know how kind of how the economy is going to be in 'twenty two.
The accuracy of everyone else's demand projections, and so I don't feel comfortable in.
In making a prediction I think it would be.
It would be subject to too much and accuracy.
But I do feel very comfortable with our operational team I think we've got a world class one.
And I'm sure they're doing everything they can do to collapse cycle times and improve yields and do all the things that you can do in addition to fundamental capacity investment to remedy the situation.
Got it.
Ill look like if I may ask you a question on gross margins for December you're essentially guiding gross margins to be flat to maybe down a little bit what slips on September.
Maybe just touch about equipping historically I would have expected gross margins to be up in December given how much revenue leverage you end up with so.
So maybe what are the puts and takes on gross margins that are resulting in a more flattish guide versus historical seasonality.
Well.
As you know typically you know obviously with December being the holiday season, we do get leverage as you say.
So the period of the year, where we launch a lot of new products and.
As you know we launched essentially in every product category, we launched new products demand is very strong, but as you know when we launch these new products, we tend to have higher cost structures at the beginning of the cycle and so that's what balances this out.
Obviously from a year over year standpoint, it's actually a significant expansion right because when you look at.
What we did.
Gotta go in the in the December quarter 39, 8% this clear.
Clearly indicates a significant expansion.
Thanks, Amit can we have the next question please.
Well hear next from Katy Huberty with Morgan Stanley.
Thank you given the supply chain is blurring the demand picture for iPhone 13, what data points can you share that help investors understand whether demand is tracking to a product cycle that is flat growing or are down from the very strong iPhone 12, and maybe on that front. Luca you can also comment on where you eggs.
Did the quarter from a channel inventory standpoint for iPhone relative to a normal product cycle, and then I've got a follow up.
Yes.
Maybe I can take both of those the channel inventory as you would expect in a constrained environment.
The iPhone channel inventory ended below the targeted range.
And and is currently below it.
So that's.
In terms of the blurring of demand we look at Kt, we look at a number of different data points, we look at demand across our online store demand in retail.
The we look through to back orders on the carrier channels.
The ones that do take back orders there.
We.
Look at channel orders as well and so we have a number of different data points that we use to conclude.
How strong demand is and we feel.
Very very good about where demand is right now.
And we're working feverishly on the supply side of that.
And Tim as a follow up we recently surveyed 4000 consumers in the U S and China and the feedback is most of them don't want to pay for apps or services direct with the developer they value the security privacy ease of transactions with the App store. So how do you think about in balance.
Seeing the regulators push for more choice with our COO.
Customer base, that's happy with the existing experience and and just as a follow on to that.
How are you and Luca thinking about the potential impact of services revenue growth rate as some of the changes to the App store go into effect.
The main thing that we're focused on the App store is too.
Keep our focus on privacy and security and so these are the two major tenants that have produced over the years, a very trusted environment, where consumers and developers.
Come together and consumers can trust the developers on the developers and the apps or what they say they are and the developers get a huge.
Of.
Audience to sell their.
Software too and so that's that's sort of number one on our list everything else is is a distant second.
And so what we're doing is working to explain the decisions that we've made that are key to keeping the privacy and security.
There, which which is to.
To not have side loading and not have alternate ways.
On the iPhone, where it opens up the iPhone two.
And reviewed apps.
And also.
By the privacy restrictions that we've put on the App store and so so we're very very focused and discussing the privacy and security elements of the App store with the regulators and legislators.
Yeah.
Thanks, Katy can we have the next question please.
We'll take our next question from David <unk> with UBS.
Yes.
Great. Thank you guys.
I just have two quick questions one big picture theoretical so you covered the supply chain and pretty extensive detail on the call, but maybe just a bigger picture on how you're thinking about it philosophically given what you just sort of went through over the last 12 months eight months. So what I mean by that is there sort of a recalibration needed or an adjustment around your supply chain philosophy, either from a partner.
Perspective, or maybe a regional perspective.
How do you think about the current infrastructure and the ability to sort of rebound in sort of handle sorted. These disruptions that seem to crop up from time to time, and then I have a follow up.
Yes.
I don't see a fundamental error that we've made.
Your pick.
Yes in terms of.
Creating the environment that we're in.
It was created for a number of reasons the pandemic came along some.
Some people in the industry and some people outside the industry thought that the pandemic with reduced demand they pulled their orders down.
Things reset and what really happened was demand went up and went up even more than.
Then.
<unk>.
Straight trend would would predict and so the industry is working through that now.
Making it a little overly simplistic theres, some other things like yields and things like that.
That are that are happening as well, but those things are mainly manageable in the course of time and so what we're doing is working with our partners on making sure that they have supply that we need and making sure that our demand statements are accurate as we see them in and so forth.
And at the same time.
We are reducing our lead times and cycle times.
So that when you get a chip off of fab as quickly as possible thats in our product and shifting.
And also helping the fab partners increase their yields and so those things are things that we're doing.
Also support the chips Act.
And.
But there too.
Put more investment in the <unk>.
In the ground.
So we're spending some time.
Advocating for the chips act as well.
Great and Thats helpful and I didn't I didn't mean to implicate that you guys had stopped just maybe came off that way and maybe just as a quick follow up when you think about purchasing devices badly you touched on that earlier.
Can you just touch on the partnerships that you have with carriers and the support that they have given you over the last couple of years, that's been a key component of your success type relationships that you have globally.
Do you think sort of this business model as it is currently sort of.
Together globally as sort of a permanent structure meeting carriers are gonna be integral part is driving demand for iphones or is there a sense that maybe it's a little bit more transitory depending on the part of the cycle that we're in.
I think that <unk> has provided a once in a decade kind of.
Upgrade potential.
A multiyear kind of thing, it's not a one year and dawn.
And I think the.
We are motivated.
They're the carriers motivated there we have mutual interests.
And the customer benefits hugely from getting.
Our new <unk> phone that has <unk> and a number of other features in it too.
And so I think.
Everybody is aligned on purpose the model that you paint is.
I wouldn't call it a global model because there are different.
Variations around the world, depending upon the country, but but in general I think that the.
<unk>.
Marriage, if you will our partnership between Apple and the carrier channels never been stronger.
And that it's on very solid footing.
Thank you and can we have the next question. Please.
Absolutely we'll take our next question from Krish, <unk> with Cowen and company.
Yes, hi, Thanks for taking my question I had two of them too and Tim I will give you a reprieve from the supply chain questions.
Two of them services.
The first one is on your new ACD, the eye tracking transplant cc, two and all the headlines. It has garnered recently I'm kind of curious the feedback you've seen or received from advertisers and users and how would the votes impacted surcharge your own business.
No the feedback and then I had a follow up.
The feedback from customers is overwhelmingly positive customers appreciate having the option of whether they want to be tracked or not and so the the there was an outpouring of.
Customer satisfaction, there on the customer side and the reason that we did this is that as you know if you've if you've followed us for a while.
We believe strongly that privacy is a basic human right.
And over and we believe that for decades, not just in the just in the last year or so and we've historically rolled out.
More and more features over time for to place the decision of whether to share data and what data to share in the hands of the user where we believe that it belongs we.
We don't think Thats Apple's role to decide and we don't think thats another company's role to decide but rather than the individual who owns the data itself and so that's our motivation there there is no other motivation.
Got it got it.
Any sort of characterization. Thank you for that and then as a quick follow up I'm just kind of curious you know the mobile gaming in your App store there've been some recent action by certain governments to limit game time.
Curious how does it affect your absolute business in those geographies and is there anything you can quantify that or is that too immaterial at this point. Thank you.
You mean limiting the time on games is that what you're getting at yeah.
Yeah exactly like in China.
It is game time and things like that.
It's.
Very difficult to measure.
Yes.
The policy that you were talking about for those people that don't know us.
Our policy to restrict.
Kids.
Though a certain age.
Two I think it's one hour on Friday Saturday Sunday.
Each and.
It's very difficult to to see the impact of it on the App store at this point.
Thank you.
Yes.
Thanks can we have the next question please.
Thank you we'll take our next question from Jimmy <unk> with J P. Morgan.
Okay. Thanks for taking my question.
Tim I wanted to.
First to start off on your come into both strong demand across products and distribution for iPhone coding. If you can give us a bit more insight about what are you seeing in terms of intent in terms of either upgrades from the installed base or even switchers right. If you can compare to life won't dwell because some of the feedback we're getting is.
For example, like strong switching activity in China. So I'm just wondering if you can get a bit more granular data in terms of the what's driving demand and who is it coming from and then I have a follow up please.
It's so early to talk about iPhone 13, because it's only been on the market four or less than 30 days now.
What I can tell you is going into the cycle. If you look at our results from last quarter.
We grew on upgrader and switchers in the double digits.
And so both were very meaningful for the for the iPhone results last quarter and so there is there is significant momentum with an iPhone.
And I would clearly characterize the demand that we're seeing currently as robust as you can tell from some.
Some of the quotes that were.
Quoting on the online store.
Okay.
As a follow up I guess back to the supply chain, but I wanted to just ask more related to cost implications there.
What are you hearing is not only <unk>, but also component costs going up so as we look to well as I think about this upcoming cycle.
Are you looking to manage component cost headwinds and is that something youre seeing.
Coming through the supply chain.
We've put our current thoughts.
Gross margin guidance that we gave you the 41, 5% to 42 five.
I would tell you that we are seeing a significant increase in freight costs.
And.
I would assume that that is pretty consistent across different companies.
So we're clearly seeing some inflation there.
Thank you.
Yep. Thanks can we have the next question please.
Thank you we'll take our next question from Jim Suva with Citigroup.
Thank you and I'll ask both my questions at the same time, probably the first one is for Tim on the services revenue much better than expected can you give us some details about what drove that was it apple stores more open some more apple care.
Sure, Apple, one or arcade or a TV or fitness.
Probably for Luke on supply chain, when you mentioned supply chain headwinds going to get worse and you mentioned 6 billion. This quarter Theres two ways to think about your terminology of worse is it the delta from $2 billion that you identified three months ago that went to $6 billion. So therefore, the delta of $4 billion gets worse.
Just saying and therefore, it's about $10 billion for December quarter or are you just saying it just gets higher than the $6 billion that you just identified.
Earlier in the call. Thank you so much to you and your team.
Jim I'm going to take the second question that you're asking Luca can take the first one on services is just in the reverse.
The way you coined it.
On the supply constraints, what we're saying is that the.
The amount of the nominal amount of supply constraints for Q1, we estimate to be larger than $6 billion.
Got it and so.
It's important to note that we are.
We're getting a lot more supply in Q1 than we had in Q4, obviously because our.
Sequential growth was significant.
And we have very solid growth year over year and so the the amount of supply is growing dramatically. It's just the demand is so robust.
We envision having supply constraints for the quarter.
Thank you Tim that makes sense.
And Jim on services.
The 26% growth rate that we had was better than what we were expecting at the beginning of the quarter and it was really across the board it's difficult to single out a specific area because we set all time records on cloud we set all time records across the board applecare.
<unk> music video advertising payments services. The App store was a September Puerto Rico. So it was strong across the board you know when we look at the services business. We always think about some fundamental factors that allow us to.
To have good visibility over the sustainability of the business right. The fact that the installed base continues to grow.
That's obviously a positive the fact that the number of people that are actually paying on the on the platform continues to grow double digits and so that obviously increases our opportunity.
The number of subscriptions that we have.
On the platform.
During the call it 745 million paid subs right now, it's an increase of $160 million.
Versus just 12 months ago, right and obviously, the fact that we continue to launch new services and new offerings within the services that we already have new features.
That.
You know, obviously gives us a lot of momentum.
Going forward, we are very fortunate we have a very now it's a very large business $68 billion in the last 12 months and very diversified.
We sell a lot of different services and our customers.
Seemed to really enjoy the experience that they have on the platform.
Thank you so much for the details.
Thanks can we have the next question please.
Thank you we'll take our next question from Chris Caso with Raymond James.
Yes. Thank you for my first question.
A question about your ability to recapture sales that you weren't able to fill in Q4 Q1 in Q2.
And you have some some experience in that from last year went up.
IPhone not all the models launched at the same time and some are late and you did recapture some of that as you went past the holidays.
I think that we should expect similar behavior. This year and then with that also as well all product categories behave similarly, meaning that or are there some product categories, where if you Miss the holidays you just missed the sale.
I think there are.
Some products that people buy as gifts.
But if it's not there that it's perishable.
But I think that.
We have a lot of products as well.
People will wait for and would expect those too.
To.
Be captured in a different time period.
So it's a combination.
For this certain quarter the holiday quarter I believe.
Okay.
As a follow up could you speak to iPhone mix and.
One of the things. We noted is that the delivery times for all iphones are a bit long because of the constraints there a bit longer on the pro and the Max.
Is that a function of supply or demand or perhaps both.
And again I would imagine you have a little better handle on that this year given that all the phones will launch at the same time.
Yeah.
Yes, it's really too early to make comments on mix at this point because it has been we have been in a constrained environment and so the.
The mix becomes more obvious once supply and demand are balanced.
Okay. Thank you.
Thanks can we have the next question please.
Thank you we'll take our next question from harsh Kumar with Piper Sandler.
Yeah, Hey, guys first of all great job managing to the Spike in change. It's a it's obviously affecting everybody. So congratulations and then 10 one for you a strategic question.
When Apple thinks about strategic areas that that as a company they want to own for example software as high priority, but you are also one of the largest semiconductor companies. If the company were stand alone <unk>.
So curious about the kind of input and thinking that goes into owning some piece of technology. For example, when we survey people. They say batteries and screens are very important so why does and Apple for example, what pauses Apple from looking at areas like that.
We look at ones, where we believe we can make a substantial difference.
A level of differentiation.
And so.
We've put a lot of energy in the silicon space, because we have felt that we could do.
Design and develop products that we could not if we were in the <unk>.
The buying what's available in the commercial market.
And as you can see more recently, we made that call.
On the Mac as well and have shifted to our to our own chips, there and so it really depends on whether we see a way to do something that's differentiated or not.
And I wouldn't want to rule.
I wouldn't want to rule anything out it's more of weather.
Whether or not we see our way clear to doing something that is.
A materially better.
So we feel like we've done that.
We feel like we've done that in the chip area.
Thanks, Thank you for that Tim and then I've got one for Luca I wanted to go back to a question asked earlier on the call a bunch of crush margins. So when I look at the September quarter.
So this is obviously grew much faster than the product business margin was down and same thing for December, but I think you're effectively saying that theres a lot of new product launches would that not going to Opex for example, marketing et cetera, as opposed to Cogs or is there something that maybe need some clarified here.
There is certainly obviously that we have launch expenses in marketing and advertising of course, when we launch new products, but the reality what happens, we always make our products better and which means adding new technology and new features to the product. So typically when you move.
One generation of products to the next one the cost structures tend to be higher, particularly at the beginning of the cycle and so when you make that transition there is always some level of margin compression from.
The transition to a new product.
The other the other aspect that you need to think about is the fact that the.
Remember, Florida is the holiday season, and so the percentage of products business that we have in the holiday quarter is higher than we have in the September quarter. For example, and therefore as you know because the services margins are higher and the products margin is.
Also a mix between the products and services business that plays.
Into that gross margins for the company right and that's what you see as you move sequentially from September to December.
Very well thank you so much.
Thank you can we have the next question. Please.
Thank you we'll hear next from <unk> Mohan with Bank of America.
Yes. Thank you.
I had a question about broadly about pricing of new products.
This year Apple launched the iPhone 13 at a slightly lower price than where the 12 was launched last year in China.
Can you maybe help us think through what what are some of the things that you look at in deciding that and is that an action that you.
Good.
More broadly in other regions and I have a follow up.
We look at a variety of things.
<unk>, our cost including competition, including.
Local conditions and exchange rates.
A number of different things and so there is not a.
There is no.
The formula for determining.
It's done by a level of judgment looking at a number of different.
Points data points.
And we do that region by region.
But we shouldn't as investors think of that as something structural that you intend to use to flex.
You know demand curves.
More it's something.
It's something we've always done and so it's not something that is new to this year in this cycle.
Okay.
Follow up.
You've introduced a lot of new services over the past few years and these have become a much more important part of the of the Apple story can.
Can you maybe share.
Either some metrics on some of the new services like TV plus in terms of paid subs.
And how are you measuring the success of these investments.
Well, we look at a number of things internally that we don't share external audience.
You can bet that we're looking at.
Subs and <unk>.
Conversions and churn and all of the normal things you would look at with a subscription business.
But we're not going to get into sharing those on an individual service space is that what we're trying to do is give you visibility to the aggregate.
Number of subscriptions that we've had which luca covered earlier with the 745 across both.
Apple branded and third party and so we're giving you an aggregated view of it instead of the at the individual service level, but.
You can bet that we're.
Managing it at the individual service level.
Okay. Thanks, Tim.
Thank you <unk> a replay of today's call will be available for two weeks on Apple podcasts as a webcast on Apple Dot com slash investor and via telephone and the numbers for the telephone replay are 8882031112 or 7194 of $5 seven zero.
Two zero. Please enter confirmation code 700, 141415. These replays will be available by approximately five PM Pacific time today members of the press with additional questions can contact Josh Rosenstock at 40886 to 142 financial analysts can contact.
Me with additional questions at 669 to $2 7240 to thank you again for joining us.
This concludes today's conference we appreciate your participation.
Okay.
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