Q4 2023 Apple Inc Earnings Call

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Good day and welcome to the Apple Q4 fiscal year 2023 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 Hassanein shrunk dramatically director of Investor Relations. Please go ahead.

Thank you good afternoon, and thank you for joining US speaking first today is Apple CEO, Tim Cook and he'll be followed by CFO Luca My history. 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.

Fact of macroeconomic conditions 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, which speak only as of the date they are made.

I'd now like to turn the call over to Tim for introductory remarks.

Thank you Sue Hassan Hey, good afternoon, everyone and thanks for joining the call.

Apple is reporting revenue of $89 $5 billion for the September quarter.

We achieved an all time revenue record in India as well as September quarter Records in several countries, including Brazil, Canada, France, Indonesia, Mexico, the Philippines, Saudi Arabia, Turkey, the UAE, Vietnam and more.

IPhone revenue came in ahead of our expectations setting a September quarter record as well as quarterly records in many markets, including China mainland Latin America, the Middle East South Asia, and an all time record in India.

In services, we set an all time revenue record with double digit growth and ahead of our expectations.

During the September quarter, we continue to face an uneven macroeconomic environment, including foreign exchange headwinds and we've navigated. These challenges by following the same principles that have always guided us we've continued to invest in the future and manage for the long term we've adapted continue.

Mostly to circumstances beyond our control, while being thoughtful and deliberate on spending.

And we've carved a path of groundbreaking innovations and delivered with excellence every step of the way.

That includes Apple vision pro which has gotten such an amazing response from developers who are currently creating truly incredible apps. We're excited to get this magical product in the hands of customers early next year.

Now, let me share more about our products beginning with iPhone.

IPhone revenue came in at $43 $8 billion, 3% higher than a year ago, and a new record for the September quarter.

This fall we were thrilled to debut the iPhone 15 lineup, the all new iPhone <unk> and iPhone <unk> plus feature a gorgeous design powerful cameras and the intuitive dynamic island.

Powered by the industry, leading a 17 pro our iPhone 15 pro lineup has a beautiful strong and durable titanium design and the best iPhone camera system ever, including a five X telephoto lens on iPhone 15 Pro Max customers are loving the entire iPhone <unk>.

<unk>.

And reviews had been off the charts.

And Mac revenue came in at seven $6 billion down 34% year over year from the prior year's record quarter.

This was due to challenging market conditions as well as difficult compares against the supply disruptions and subsequent demand recapture we experienced a year ago.

Earlier. This week, we were excited to unveil the next generation of Apple Silicon with our incredible family of M. Three chips, and three and three pro and in three Max.

We're continuing to innovate at a tremendous pace and our industry leading lineup of personal computers, just got even better the new Macbook Pro lineup brings our most advanced technology to our pro users while imac the world's best selling all in one just got faster and more capable.

And according to the latest data from student monitor nearly two out of three college students chosen Marc we couldnt be more excited about the future.

Turning to iPad revenue for the September quarter was $6 $4 billion iPad sets the gold standard for tablets and our competitors are unable to match. The iPad experience that is enabled by our seamless integration of hardware and software.

IPad is also our most versatile product in classrooms around the world, it's helping educators bring lessons to life, while giving students a window into the world around them.

And an artist workshops design studios and everywhere else creative minds come together ipads supercharging, the creative process, helping users take their ideas farther than they ever could before.

Across Wearables home and accessories revenue came in at $9 $3 billion Apple watch has become a central in our lives and this is our best Apple watch lineup ever with Apple Watch series nine an Apple watch ultra too, we're giving people even more tools to stay safe and live healthy.

The active lives with a new double top gesture users can easily control Apple watch series non an Apple watch ultra to using just one hand and without touching the display it feels like magic our latest Apple watch lineup also includes our first ever carbon neutral products.

A significant achievement of innovation and determination.

Apples unique ecosystem of hardware software and services delivers an unparalleled user experience during the.

Quarter, we also had the chance to introduce a range of exciting new updates to our software that will allow users to get even more out of their devices.

Whether it's personalized contact posters and new face time features in iOS 17, new tools for users to make their experience their own and Mac OS Sonoma, an iPad or 17 or a bold new look and watch hours 10 that let you see in <unk>.

More faster than ever Apple is delivering an even better richer experience that users are loving.

Services revenue set an all time record of $22 $3 billion, a 16% year over year increase we achieved all time revenue records across App store advertising Applecare icloud payment services in video as well as the September quarter revenue.

Record and Apple music, whether subscribers are waking up to headlines on Apple news plus getting their morning workout in with fitness plus feeling the b with Apple music on their way to work or school or unwinding at the end of the day with Apple arcade, we have so many different services to enrich their day.

Apple TV plus continues to delight customers as well with new and returning shows like the morning show lessons in chemistry, and monarch, we're telling impactful stories that inspire imagination and started the sole making.

Making movies that make a difference is also at the heart of Apple TV, plus and we were thrilled to produce Martin Scorsese's killers of the flower Moon are powerful work as cinema that premiered in theaters around the world allow smart.

We're proud to say that since launch just over four years ago, Apple TV plus has earned nearly 1600 award nominations and nearly 400 wins.

We also offer subscribers an unprecedented live sports experience with MLS season pass, we couldnt be more pleased with how our partnership with major League soccer has gone in its first year.

Subscriptions to MLS season pass have exceeded our expectations and we're excited to continue that momentum next year with the playoffs now underway, we can't wait to see who takes home the MLS cop.

And nowhere does the magic of Apple come alive more than it does in our stores over the past year. We've continued to find ways to connect with even more customers, we welcomed customers to our first ever retail locations in India. We also opened doors to new stores in Korea, China, and the U K and.

Expanded the Apple store online to Vietnam and Chile.

And we have another store opening in China. This week in September I joined our team at Apple Fifth Avenue on launch day, and the energy and excitement were unbelievable.

Every time, we connect with the customer we're reminded why we do what we do.

From simple joys of creating and sharing memories to life saving features like emergency Sos via satellite we're enriching lives in ways large and small and whether we're working to safeguard user privacy ensure technology made by Apple is accessible for everyone or building even more <unk>.

<unk> of workplace, we're determined to lead with our values.

Our environmental efforts are a great example of the intersection of our work and our values across Apple We act on a simple premise the best products in the world should be the best products for the world.

We've made our environmental work a central focus of our innovation, because we feel a responsibility to leave the world better than we found it and because we know that climate change cannot be stopped unless everyone steps up and does their part.

Our first ever carbon neutral products represent a major milestone and we're going to go even further we plan to make every product across our lineup carbon neutral by the end of the decade.

And we're not doing it alone over 300 of our suppliers have committed to using 100% clean energy for Apple production by 2030.

We also continue to invest in entrepreneurs, who are lighting the way for a greener more equitable future.

Through our third impact accelerated class, we're proud to support a new class of diverse innovators on the cutting edge of Green technology and clean energy.

Apple is always looking forward driven in equal measure by a sense of possibility.

A deep belief in our purpose, we're motivated by the meaningful difference, we can make for our customers and keenly determined to push the limits of technology even further.

And that's why I'm, so confident that Apple's future is bright.

With that I'll turn it over to Luca.

Thank you Tim and good afternoon, everyone.

Revenue for the September quarter was $89 5 billion down less than 1% from last year Foreign exchange had a negative impact of over two percentage points and on a constant currency basis. Our revenue grew year over year in total and in each geographic segment, we set a September quarter.

Record in the Americas and saw strong performance across our emerging markets, where both iPhone and services grew double digits.

Products revenue was $67 2 billion down 5% from last year due to very challenging compares on both Mac and iPad, which I will discuss in more detail later on at.

At the same time, we reached a September quarter record on iPhone driven by strength in emerging markets. Our total installed base of active devices reached an all time high across all products and all geographic segments. Thanks to our high levels of customer satisfaction and many new customers joining our.

As for them.

Our services revenue set an all time record of $22 3 billion up 16% year over year with growth accelerating sequentially from the June quarter, our performance in services was broad base.

As we reach all time revenue records in the Americas, Europe, and rest of Asia Pacific and a September quarter record in greater China.

We also set new records in every services category.

Company gross margin set a September quarter record at 45, 2% up 70 basis points sequentially, driven by leverage and favorable mix, partially offset by foreign exchange products gross margin was 36, 6% up 120 basis points sequential.

<unk> also driven by leverage and mix, partially offset by foreign exchange.

Services gross margin was 79% up 40 basis points from last quarter due to a different mix.

Operating expenses of $13 5 billion were at the low end of the guidance range, we provided up 2% year over year.

Net income was 23 billion diluted earnings per share was a $1 46 up 13% versus last year and our September quarter record.

And operating cash flow was strong at $21 6 billion.

Let me now provide more detail for each of our revenue categories.

IPhone revenue was $43 8 billion up 3% year over year, and a new September quarter record.

We had strong performance in several markets, including an all time record in India and September quarter Records in Canada, Latin America, the Middle East and South Asia.

Our iPhone active installed base grew to a new all time high in fiscal 2023 was another record year for switches, we continue to see extremely high levels of customer satisfaction, which <unk> research recently measured at 98% in the U S.

Macro revenue was $7 6 billion down 34% year over year, driven by challenging market conditions and compounded by a difficult compare in our own business whereby last year, we experienced supply disruptions from factory shutdowns in the June quarter and were subsequently able to.

We'll see a significant pent up demand during the September quarter. We also had a difference in launch timing with the Macbook air launching earlier this year in the June quarter compared to the September quarter last year.

We have great confidence in our Mac lineup and are excited about the recently announced imac and Macbook pro powered by our entry chips.

Our installed base is at an all time high and half of Mac buyers during the quarter were new to the product driven by Macbook Air.

Also we sold reported customer satisfaction of 97% for Mac in the U S.

IPad generated $6 4 billion in revenue down 10% year over year.

<unk>. These results were a function of a difficult compare from the supply disruptions in the June quarter, a year ago and the subsequent fulfillment of pent up demand in the September quarter iPad continues to attract a large number of new customers to the installed base with over half of the customers who purchase ipads during the quarter being new to the broad.

And the latest reports from 45, one research indicate customer satisfaction of 98% in the U S.

Wearables home and accessories revenue was $9 3 billion down 3% year over year, we had a September quarter record in Europe, and we saw strong performance in several emerging markets around the world.

I'll watch continues to expand its reach with nearly two thirds of customers purchasing an apple watch during the quarter being new to the product and customer satisfaction for the watch was recently measured a 97% in the U S.

Services had a great quarter.

We reached a new all time revenue record of $22 3 billion up 16% year over year.

And we're happy to see growth coming from all categories. In every geographic segment, which is a direct result of the strength of our ecosystem.

Our installed base of over 2 billion active devices continues to grow at a nice space and establishes a solid foundation for the future expansion of the ecosystem.

And we continue to see increased customer engagement with our services, both transacting accounts and paid accounts grew double digits year over year, each reaching a new all time high.

Also our paid subscriptions showed strong growth, we have well over 1 billion paid subscriptions across the services on our platform nearly double the number we add only three years ago.

And finally, we continue to improve the breadth and quality of our content services.

From exciting new content on Apple TV, plus an Apple arcade to additional storage tiers on icloud, we believe our customers will love these new offerings.

Turning to enterprise, we are excited to see our business customers in both developed and emerging markets expand their deployment of Apple products and technologies to drive business innovation and employee satisfaction.

Starbucks continuously investing Apple technology to bring the best experience to their customers and employees, including tens of thousands of ipads across all retail stores to have their teams streamline or the management operations and training. In addition, Starbucks recently refreshed over 10000 Max to delay.

<unk> M. Two powered Macbook air for all store managers, enabling them to do their best work and improve productivity.

And in Indonesia popular technology company go to ease offering Mac is a choice. So that employees can have the best tools to be most productive today more than half of its workforce I'd already choosing Mac for work.

Let me now turn to our cash position and capital return program.

We ended the quarter with over 162 billion in cash and marketable securities. We increased commercial paper by 2 billion, leaving us with total debt of $111 billion. As a result, net cash was 51 billion at the end of the quarter and our goal of becoming net cash neutral over time remains unchanged.

<unk> during.

During the quarter, we returned nearly $25 billion to shareholders, including $3 8 billion in dividends and equivalents and $15 5 billion through open market repurchases of 85 million Apple shares. We also began at $5 billion accelerated share repurchase program in August.

The resulting in the initial delivery and retirement of 22 million shares.

Taking a step back as we close our 2023 fiscal year.

Our annual revenue was 383 billion.

While it was down 3% from the prior year, we grew on a constant currency basis, despite a volatile an uneven macroeconomic environment our year over year revenue.

<unk> improved each quarter as we went through the year and so did our earnings per share performance as we reported double digit EPS growth in the September quarter.

We are particularly pleased with our performance in emerging markets with revenue, reaching an all time record in fiscal 2023 and double digit growth in constant currency. We are expanding our direct presence in these markets from new Apple retail stores in India to online stores in Vietnam in Chile.

And we continue to work with our partners to offer a wide range of affordability programs. So that we can best serve our customers. We're very excited about the momentum we have in these markets and the opportunity ahead of us.

As we move ahead into the December quarter I'd like to review our outlook, which includes the types of forward looking information that <unk> referred to at the beginning of the call.

The color we are providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter also on foreign exchange, we expect a negative year over year revenue impact of about one percentage point.

As a reminder.

The December quarter. This year, we lost the usual 13 weeks, whereas the December quarter, a year ago spanned 14 weeks for clarity.

Revenue from the extra week last year added approximately seven percentage points to the quarter's total revenue.

Despite having one less week. This year, we expect our December quarter total company revenue to be similar to last year.

We expect iPhone revenue to grow year over year on an absolute basis.

We also expect to grow after normalizing for both last year's supply disruptions and the one extra week.

We expect Mac year over year performance to significantly accelerate from the September quarter.

We expect the year over year revenue performance for both iPad and Wearables home and accessories to decelerate significantly from the September quarter due to a different timing of product launches an iPad, we launched a new iPad pro and iPad 10th generation during the December quarter, a year ago.

For the Wearables category last year, we had the full December quarter benefit from the launches of the Airpods Pro second generation to watch SC and the first watch altra.

For our services business, we expect the average revenue per week to grow at a similar strong double digit rate as it did during the September quarter.

We expect gross margin to be between 45 and 46%.

We expect opex to be between $14 4 billion and $14 6 billion.

We expect <unk> to be around negative $200 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> 24 per share of common stock payable on November 16, 2023 to shareholders of record as of November 13, 2023 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.

Certainly we will go ahead and take our first question from Mike <unk> of Goldman Sachs. Please go ahead.

Hey, good afternoon, and thank you very much for the question.

I just have a question on iPhone storage and demand.

Versus icloud.

Demand for storage grows are you seeing a mix shift towards higher storage iPhone models or our consumers, mostly opting for the same because of increased uptake of ical icon plus.

What are some of the strategic and financial considerations here.

And tradeoffs as you think about the mix shift towards higher storage models versus icon penetration. Thanks.

Michael It's Tim we as you probably know we started the line.

With the.

The iPhone <unk> at $2 56, and so we are seeing a different mix if you will.

This year than last year.

Outside of that.

Not significant significant changes.

Great. Thank you and as a separate follow up I was just wondering if you could talk a little bit about the market conditions on notebooks and desktops.

And any color that you can share regarding the timing of the Max and three Macbook pros this year.

This is the two earlier in the calendar year. Thank you.

We're thrilled to have announced in three lineup.

Get the new Macbook pro and the new imac out there.

We couldnt be more excited about it.

As Lucas said.

With the.

The lineup that we've got and the compare issue that we don't have.

During Q1, we anticipate.

A significant acceleration.

And the Max base for Q1.

To just repeat a little bit about.

The circumstances of the.

The performance last quarter.

In the year ago June quarter, we had a factory disruption that last several weeks.

The pent up demand that resulted from that was spilled into the September quarter and that made the September quarter.

Not only a record, but a substantial record and obviously, we're now comparing against that or.

23, and so as that.

I wouldn't look at the negative 34 is representative of the underlying business.

Performance is sort of the net of it.

Excellent that's very clear. Thank you Tim Yeah, alright, Thanks, Mike can we have the next question. Please.

Our next.

Question is from Aaron Rakers with Wells Fargo. Please go ahead.

Yeah.

Yes, thanks for taking the question and congratulations on the execution in the quarter I am curious if you could help us characterize what the demand environment, you're seeing in China looks like.

How has the reception been to the iPhone <unk> and kind of similar question the prior one.

How would you characterize the mix within China as you go through this current product cycle and I have a follow up.

Yes, if you look at how we did in greater China for the quarter. We came in on a revenue basis minus two but one thing to keep in mind here is that the FX impact.

With nearly six points. So we grew in constant currency and underneath that if you look at the different categories.

Phone.

Actually set a September quarter record in.

In mainland China.

And the.

What pulled down the performance was a combination largely of Mac and iPad.

Services also grew during the quarter and the Mac and iPad.

Suffered from the same issues that the company did with the compare issues to factory disruptions in Q3 that were filled and subsequently in Q4 22.

We had the in addition to that we had the top four selling phones in urban China for last.

Last year.

I just took a trip over there and.

Could not be more excited about the interactions I had with customers and employees.

And others.

Yes, and then as a quick follow up I'm curious as we move towards more of an inflationary component pricing environment look at how do we think about that a fact or how youre thinking about the gross margin at the product level.

Maybe component pricing starts to turn whats been clearly very favorable over the last several quarters to more of a inflationary environment. Thank you.

Well.

As you've seen from our results in <unk>.

Q4, and the guidance for Q1.

We're obviously experiencing very strong levels of gross margin.

The 45 two.

<unk> was a record for the September quarter.

And then the guidance for Q1 is obviously strong at 45% to 46%.

Our gross margins are affected by multiple factors, obviously, the commodity environment is one of them as you mentioned.

It's been a good environment.

In recent quarters.

But equally important is the mix of what we sell.

And obviously growth in services for us is favorable.

And that has helped our company gross margin.

Foreign exchange on the other hand has been a drag for us for several quarters given the strength of the dollar.

We don't provide guidance past.

The December quarter, which is a very important one for us because it's the beginning of that product cycle for many products and so we feel very good very confident about.

Just coming here and I think the gross margin guidance reflects that.

Okay. Thank you.

Thanks, Erin can we have the next question please.

Our next question is from Erik Woodring with Morgan Stanley. Please go ahead.

Awesome. Thank you very much for taking my questions.

Maybe if I start Luca I know that the iPhone <unk> pro and pro Macs are constrained today, but I think some of your comments suggests you should be back to supply demand balance before quarter end. So I guess my question is does your December quarter revenue guidance account for any supply constraints and if so is there any way to kind of quantify how much <unk>.

<unk> would be limiting your December quarter revenue performance and then I have a follow up thank you.

Yes, it's correct that we are constrained today on iphones 15 pro and <unk> Pro Max we're working very hard to get the product in the hands of the customers that have ordered it we expect as of today that we're going to be in supply demand balance.

By the end of the quarter. So the guidance reflects that.

Okay very clear thanks, and then maybe for you and Tim you guys have been on the leading edge of innovation across hardware software Silicon services and I'm sure, there's plenty of technologies and kind of longer term.

Projects that you're investing in.

How should we think about your capital intensity as we look to fiscal year 'twenty for just given you know over the last few years Capex as a percentage of revenue has been relatively low compared to the eight years. Prior so should we expect a step up or kind of similar capital intensive intensity and what are the more notable moving pieces if any.

But we should be thinking about thanks.

Well the big areas of investment for Us are two.

Tooling and equipment for manufacturing plants.

Our investments in data centers, and our investments in our own facilities, both corporate facilities and retail stores.

And so.

Both for the tooling in our plants and our data center investments, we tend to have a bit of a hybrid model, where we share some of the investments with our partners.

And suppliers and so maybe that's why you see sometimes a bit of variability.

But over the last few years, we've made all the investments that the.

And we needed to make and obviously, we are planning to make all the investments that we believe are needed and appropriate.

In order to continue to innovate.

Great. Thanks, so much for the color guys.

Thanks, Eric can we have the next question please.

Our next question is from David <unk> with UBS. Please go ahead.

Great. Thanks, guys for taking my question.

I know you cover China, I want to pivot to the U S for a second obviously iPhone in the business looks like a return to growth in the quarter.

But it's still relatively softer kind of.

I thought it would be at this point in the cycle and some of the U S carriers, obviously hasnt been that particularly aggressive.

And promote promoting upgrades. So just wanted to kind of get a sense for what youre seeing from your partners in the U S kind of currently and going forward and what do you expect and then second Luca on the margins I mean is it fair to say that the mix in Q1 from a product versus services.

Dynamic is kind of the key driver of the better gross margin guide as a whole relative to let's say the December quarter.

Or is there anything else I know you mentioned there is a lot of moving pieces, but is that the primary driver of the uplift in the margin. Thanks.

On the U S carriers in the U S business in general, it's really too early to call the iPhone cycle.

Particularly with the constraint around the pro and pro Macs.

<unk> tends to.

To do quite well with those products.

It's really too early to tell what the upgrade rates will be.

What the switch where rates will be.

On the on the margin side.

If I understood. Your question correctly about the December quarter guidance.

Keep in mind that actually December is the quarter, where our products business is <unk>.

Very heavy because of the holiday season.

And so the services gross margins to that accretive to total company have an impact, but not as meaningful as the quarters during during the year and so I think that.

The main drivers of the guidance that we provided or the fact that we are seeing improved costs and improved mix on our on the product side of the business, partially offset by foreign exchange, which continues to be a drag both sequentially and on a year over year basis.

Got it so the weakness in iPad and Wearables are less of an impact on sort of the margin trajectory in the December quarter. That's correct, Yes, that's correct got it. Thanks. Thanks Luca.

Great. Thanks, David we'll take our next question please.

Our next question is from.

<unk> <unk> with Evercore. Please go ahead.

Yeah.

Good afternoon. Thanks for taking my question I have two as well I guess first off just the services growth rate. There was a tremendous acceleration I think in September quarter to 16% growth and it sounds like it's going to hold that pretty wanted to December can you just talk about what is driving this exploration. Other a couple of products that have just stepped up in a very meaningful way just maybe flush out like what is driving that acceleration because it's fairly notably.

Compared to what you've been seeing the last few quarters.

We had a really strong quarter across the board because both geographically and from a product category standpoint, we saw very significant growth I mentioned the records on a geographic basis.

And from a category standpoint.

Literally we set records in each one of the big categories. We had all time record for App store for advertising for cloud video applecare payments in our September quarter record for music. So it's hard to pick.

One in particular, because they all did well and really then we step back and we think about why is it that our services business is doing well and it's because we have an installed base of customers that continues to grow on a very nice space and engagement in our ecosystem continue.

To grow we have more transacting accounts, we have more paid accounts, we have more subscriptions.

On the platform and.

And we continue to add we continue to add content and features we are adding a lot of content on TV plus new games on Apple arcade.

New features.

New new storage plans for icloud. So it's a combination of all these things and the fact that the engagement in the ecosystem is improving and therefore the benefits every service category.

Got it that's really helpful. And then maybe if I could ask you about vision Pearl, which I believe is supposed to be launched more broadly sometime in 2024 and the early part of the year.

I'm curious how different do you think the launch and the consumer education of this product or a new category will be versus other things like Airpods and Apple watch that you've done and then perhaps any team.

Are you from.

The developers that are being able to use this in the develop for labs, what feedback have you gotten from them.

Yes, that's a great question Theres, a tremendous amount of excitement around the vision.

And where we've been very happy to share it with developers.

And we have developer lab set up in different parts of the world. So that they can actually get their hands on it and are working on apps.

I've been fortunate enough to see a number of those.

There is some real blow away.

Kinds of things that are that are coming out and so that all looks good to answer. Your question about is it similar to Airpods or Apple watch I would say no there is.

<unk> never been a product.

Life Division Pro.

And so we.

We're purposely bringing it out in our stores only so we can.

Really put a great deal of attention on the last mile of it we'll be offering demos in the stores.

And it'll be a very different.

Process.

The normal grabbing go kind of process.

Perfect. Thank you.

Thanks, Amit we will take the next question. Please.

Our next question is from harsh Kumar with Piper Sandler. Please go ahead.

Yeah, Hey, thanks for the question and congratulations on tremendous execution in a very tough macro actually Tim and the last question is a perfect segue here given what you are doing with your.

Vision pros so lots of companies are experimenting regenerative AI I'm curious about what kind of efforts you have I'm sure. There are segways into provision that that you have but I was curious about if you can give us a glimpse on how you might be able to monetize some of these efforts.

Regenerative AI.

If you kind of zoom out and look at what we've done on AI and machine learning and how we've used it.

We view AI and machine learning is fundamental technologies and <unk>.

Integral to virtually every product that we show up.

And so just recently when we shipped Iowa 17. It had features like personal voice and live voice Mail AI is at the heart of these features and then <unk>.

You can go all the way it's been life saving features on the on the watch and the phone like fall detection crash detection.

ECG on the watch.

These would not be possible without AI and so.

We don't label them as such if you will we label them as to what their consumer benefit has been.

The fundamental technology behind it.

Is AI and machine learning.

In terms of generative AI.

We have obviously, we have work going on I'm not going to get into details about what it is because you know as you know we don't we'd really don't do that.

But you can bet that we're investing we're investing.

Quite a bit.

We are going to do it responsibly.

It will.

You will see product advancements over time that where those technologies are at the heart of them.

Thanks, Tim very clear and for my follow up I had a philosophical question. So you guys always try to provide the best experience for consumers.

To that end I think over the last decade in sourced a lot of important chips in your phones and your and your match ipads. So on and so forth and that was I think a function that that wasn't around in the industry from a merchant angle, but now.

You can see these are silicon guys. The chip guys moving to arm architecture. So my question to you is.

Has the move to an internal silicon been economically profitable proposition for Apple.

Or is it or is it a strategic one way you simply need to own this sentence vital to your products for the consumer experience or maybe there is a path back to chip vendors.

Point in time.

It's really enabled us to build products that we could not build without doing it ourselves.

And as you know, we'd like to own the primary technologies.

And the products that we ship and arguably the silicon is at the heart of the primary technologies.

So no I don't see going back.

Uh huh.

Happier today than I was yesterday that I was last week that we've made the transition that we've made in <unk>.

See the benefit everyday.

Thanks, Tim.

Thank you harsh we'll take the next question please.

Our next question is from <unk> Mohan from Bank of America. Please go ahead.

Yes. Thank you so much.

Tim over the last decade pretty much you gained a lot of share in China.

You look.

Here are some of the domestic players are starting to re emerge, especially in the high end phone space.

I know you touched on China, but how would you see apples positioning and opportunity for continued share gains, particularly in China and how was the linearity in China from a demand perspective, and I will follow up with.

In the September quarter, we set an iPhone.

Record revenue record and in China, and we're very proud of that.

And we obviously grew.

The market the market.

Predictions that ive seen would have the market contracting.

And so if those are correct then we gained share last quarter.

And so we're very proud of that.

I don't know what every quarter, we will hold and obviously, we just give.

Bit of color on the current quarter.

But over the long term.

View.

China is an incredibly important market.

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I am very optimistic about it.

Okay, Thanks, and as a follow up.

Have a great service this quarter and part of part of your services business has these licensing relationships with search partners, where are you sort of a very important distribution function for them can you talk about how you think about these relationships and potentially some of the options maybe apple has to mitigate some of the risks given some of the scrutiny on.

With with some of these search partners. Thank you so much.

They are important relationships and as you know, we don't get into our commercial.

Relationships in.

In the call.

I see them as important and we make decisions.

That are in the best interests of our users are what we feel is in the best interest of our users.

That's kind of what we've done in the past and how we how we run the show and in the future as well.

Okay. Thank you Tim.

Thank you Amit can we have the next question. Please.

Our next question comes from Krish Shankar with TD Cowen. Please go ahead go ahead, yeah, hi, Thanks for taking my question I have two of them first one Luca.

Thanks for the color on the gross margin and I look at it over the last four quarters, even if on a year over year basis revenue declined our gross margins have improved and I understand services definitely helps I'm just kind of curious when you look at on a go forward basis.

Most of the big step functions and cost reductions like the Mac silicon conversion et cetera that are done or is there more room for margin expansion from here and then I had a follow up.

Well.

On the product side.

As you know, we when we launched new products the cost structures of those products tend to be higher than the products that they replace.

It happens because we are always having new technologies New features and then we worked through.

The cost curve over the over the lifecycle of the product and we tend to get benefits as time goes by.

The guidance that we provided for December reflects all of that and so we're starting from a better position than a year ago or then.

Okay.

In the past in general.

There are other factors.

The play a role for example, the mix of products that we sell not every product has the same gross margin profile.

And so our guidance our results.

Collective of that and also within a specific product category a lot depends on the kind of models that we sell because they have different different margin profiles I think one of the things that we've done well over the last few years is to offer more.

Affordability solutions to our customers in the form of installment plans trading options.

And spend low cost financing in general and what data is accomplished is reduce the affordability threshold for our customers and therefore.

They can be.

By at the top of our product ranges that has been a big factor in the reason for our margin expansion.

We don't provide guidance or color pass that cutting quarter, because there's so many different variables that affect gross margins, but we obviously feel very good about the trajectory that we've had in 2023 and now the guidance that we provide for the beginning of a Cisco 24.

And we need some of these things because obviously the foreign exchange environment has been difficult and it has been a bit of a drag for us but net net we're very pleased where we are.

Got it thanks for that Luca and then a follow up for Tim.

Obviously, we're seeing amazing momentum in India, I'm, just kind of curious how do you look at when you look at the India growth opportunity on these hardware units.

How to think about AFP relative to that versus like the rest of the geographies and is there any way to compare or contrast, India.

Growth momentum, which was China, maybe a decade ago or so at the same point in the rollout of <unk>.

You know the share gains in that geography.

Yes, it's a great question.

We had a all time revenue record in <unk>.

India, we grew very strong double digits.

It's incredibly exciting market for us.

A major focus of ours.

We have low share in a large market.

So it would seem.

There's a lot of headroom there.

The asp's.

I haven't looked at them most recently, but I'm sure that they are lower than.

Worldwide.

But that doesn't bother us.

At all.

Just.

And in terms of the similarity I would say each country has its own journey and I wouldn't want to play their comparison game, but what we see.

An extraordinary market a lot of people moving into the middle class.

Distribution is getting better.

Lots of positives, we put two retail stores there as you know they are doing better than we anticipated.

It's still early going they're off to a good start.

I couldnt be happier with how things are going at the moment.

Thanks, Tim.

Thank you Chris will now take our next question. Please.

Our next question is from Ben Reitzes with Melius Research. Please go ahead.

Hey, Thanks, a lot I appreciate the question Tim.

I appreciate all your commentary around China.

Hate to kind of hear about the growth potential there or your optimism.

I wanted to also ask about the supply chain and where.

Is your priority do you have a priority to diversify your supply chain, how do you feel about Apple's supply chain around the world and in particular, what do you think about further investments in the U S as well.

Our supply chain is truly global and so we're investing all over the world.

Including in the United States.

We were.

Very focused on advanced manufacturing for the U S and it worked on a number of different projects.

In the U S whether it's.

Our venture with Corning on the glass or <unk>.

<unk> module or semiconductors, and so all of these are our advanced manufacturing and I think exactly the kinds of things.

The U S would be would be in.

We are very very good.

We also invest in other regions of the world and we're.

We are continually optimizing the chain.

And so we.

The moment, we learned something that didn't work exactly right we are tweaking it.

And so where we're going.

To continue to do that.

But but at the end of the day.

It will still be a global supply chain.

Got it thanks.

Next one for Luka, just really quick on the extra week dynamic. There was also last year an issue with the.

IPhone production, where there was the COVID-19 lockdowns in China.

Is it possible to give some color around what that.

Having a normalized supply chain somewhat this year what that benefit is this year and maybe contrast that with the seven point hit from the extra week. Thanks, a lot yes. Thanks for the question Ben.

And I mentioned during the prepared remarks.

The extra week is seven points of revenue, we did have disruptions supply disruptions last year on the phone.

On the 14th Pro and pro Macs.

In the December quarter, a year ago.

And when we normalize for those two factors and I said it during the call.

We still expect to grow on iphones. So you take into account the.

The loss of the extra week, you're comparing with the supply disruptions.

Going to repeat hopefully this year and when you normalize for those two things, we still expect to grow an iPhone.

Thanks, a lot everybody appreciate it Lisa thank.

Thank you Ben and we will take the last question now.

Our last question comes from Richard Kramer with Arete Research. Please go ahead.

Thank you very much Tim.

Tim first off if we look over the past two years, Apple sales or about $18 billion higher in R&D, it's up by about 8% 8 billion or over a third higher can you give us a sense of some of the main components of drivers behind that increase in innovation spend is it apples silicon into that new products like vision pro or is it content to support <unk>.

Services I think that's one of the top questions investors have.

Sure, it's a number of things Richard.

Some things I can't talk about vision pro.

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AI and ml.

It's the silicon investment that we're making.

The transition with.

The Mac.

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And other silicon.

It's sort of all of those things and.

I think you would find that the.

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R&D expenditure in the aggregate looks very competitive versus others.

And I would add Richard on this front some of the investments that we're making in R&D or <unk>.

Also one of the drivers for the gross margin expansion and so I think it's important to think about it that way.

Hmm.

Great and Luca you mentioned, Tim mentioned college students choosing Mac then you mentioned the record services revenue what are the metrics do you think you could provide to help investors understand how apple measures.

Increases customer lifetime value, especially when we see a lot of users entering the ecosystem with a relatively lower priced products or even refurbished devices. So youre growing your ecosystem, but how do you. How do you think about growing customer lifetime value over the long run well some of the metrics that I have mentioned before.

Obviously, we.

Look at the installed base of active devices, we see we want to make sure that the customers that we acquire remain with us and so we have good visibility over that and we pay a lot of attention to the behavior of the installed base, both by product and by geography, and then we look at the daily engagement and <unk>.

Ecosystem. So that's why we pay a lot of attention.

On things like transacting accounts paid accounts.

Want to see if in fact, we are able to move.

Our customers from a free model to a paid.

Our model over time, that's obviously.

Very very important for us.

So this all of this we keep track of all these things in.

That's.

And then what we do because I think it's a really important is that overtime, we add new services.

And that obviously like for example of the progress that we've made in payments in recent years very very important because we've attracted more and more people that actually know.

Using additional features on our devices and we are able to monetize that right. So we take all of that all that into account, we understand what happens when a customer joins us.

When they buy a primary device versus a used device that we understand their behavior.

And different markets and so on so we have I think pretty good visibility and I think the progress that we're making in services, we did $85 billion in the last 12 months.

The size of a fortune 50 and.

Significantly bigger than it was just a couple of years ago.

Absolutely thanks very much.

Thank you Richard 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 number for the telephone replay at 8665831035, please enter confirmation code zero one.

106234, followed by the pound sign.

These replays will be available by approximately five PM Pacific time today.

Members of the press with additional questions can contact Josh Rosenstock at 400, 886 to 142 and financial analysts can contact me to ask me chunk O'malley with additional questions. At 408 970 43123. Thank you again for joining us today.

Once again this does conclude today's conference we do appreciate your participation.

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