Q2 2024 Apple Inc Earnings Call

By CFO Luca on 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.

Impact 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.

Suhasini Chandramouli: 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 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.

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

Suhasini Chandramouli: 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.

Luca Maestri: Thank you <unk> good afternoon, everyone and thanks for joining the call today.

Timothy D. Cook: Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, Apple is reporting revenue of $90.8 billion and an EPS record of $1.53 for the March quarter. We set revenue records in more than a dozen countries and regions. These include, among others, March quarter records in Latin America and the Middle East, as well as Canada, India, Spain, and Turkey.

Tim: Apple is reporting revenue of $98 billion and an EPS record of $1 53 for the March quarter.

Timothy D. Cook: We set revenue records in more than a dozen countries and regions. These include among others March quarter Records in Latin America, and the Middle East as well as Canada, India, Spain and Turkey.

Timothy D. Cook: We also achieved an all time revenue record in Indonesia, one of the many markets, where we continue to see so much potential.

Timothy D. Cook: In services, we set an all time revenue record up 14% over the past year.

Timothy D. Cook: We also achieved an all-time revenue record in Indonesia, one of the many markets where we continue to see so much potential. In services, we set an all-time revenue record of 14% over the past year. Keep in mind, as we described on the last call, in the March quarter a year ago, we were able to replenish iPhone channel inventory and fulfill significant pent-up demand from the December quarter COVID-related supply disruptions on the iPhone 14 Pro and 14 Pro Max.

Timothy D. Cook: Keep in mind as we described on the last call in the March quarter, a year ago, we were able to replenish iPhone channel inventory and fulfill significant pent up demand from the December quarter Covid related supply disruptions on the iPhone 14 pro and <unk> Pro Max.

Timothy D. Cook: We estimate this one-time impact added close to $5 billion to the March quarter revenue last year. If we removed this from last year's results, our March quarter total company revenue this year would have grown. Despite this impact, we were still able to deliver the records I described.

Timothy D. Cook: We estimate this onetime impact added close to $5 billion to the March quarter revenue last year.

Timothy D. Cook: If we remove this from last year's results our March quarter total company revenue. This year would have grown. Despite this impact we were still able to deliver the records I described.

Timothy D. Cook: Of course, this past quarter, we were thrilled to launch Apple Vision Pro, and it has been so wonderful to hear from people who now get to experience the magic of spatial computing. They describe the impossible becoming possible right before their eyes, and they share their amazement and their emotions about what they can do now, whether it's reliving their most treasured memories or having a movie theater experience right in their living room.

Timothy D. Cook: Of course, this past quarter, we were thrilled to launch Apple vision Pro and it has been so wonderful to hear from people, who now get to experience the magic of spatial computing.

Timothy D. Cook: They describe the impossible, becoming possible right before their eyes and they shared their amazement and their emotions about what they can do now whether it's reliving their most treasured memories are having a movie theater experience right in their living room.

Timothy D. Cook: It's also great to see the enthusiasm from the enterprise market. For example, more than half of the Fortune 100 companies have already bought Apple Vision Pro units and are exploring innovative ways to use them to do things that weren't possible before. And this is just the beginning.

Timothy D. Cook: It's also great to see the enthusiasm from the enterprise market for example, more than half of the Fortune 100 companies have already bought Apple vision pro units and are exploring innovative ways to use it to do things that weren't possible before and this is just the beginning.

Timothy D. Cook: Looking ahead, we're getting ready for an exciting product announcement next week that we think our customers will love. And next month, we have our Worldwide Developers Conference, which has generated enormous enthusiasm from our developers. We can't wait to reveal what we have in store.

Timothy D. Cook: Looking ahead, we're getting ready for an exciting product announcement next week that we think our customers will love and next month, we have our worldwide developers conference, which has generated enormous enthusiasm from our developers we can't wait to reveal what we have in store.

Timothy D. Cook: We continue to feel very bullish about our opportunity in generative AI. We are making significant investments, and we're looking forward to sharing some very exciting things with our customers soon. We believe in the transformative power and promise of AI, and we believe we have advantages that will differentiate us in this new era, including Apple's unique combination of seamless hardware, software, and services integration, groundbreaking Apple Silicon with our industry-leading neural engines, and our unwavering focus on privacy, which underpins everything we create.

Timothy D. Cook: We continue to feel very bullish about our opportunity in generative AI, we are making significant investments and we're looking forward to sharing some very exciting things with our customers soon.

Timothy D. Cook: We believe in the transformative power and promise of AI and we believe we have advantages that will differentiate us in this new era, including apples unique combination of seamless hardware software and services integration groundbreaking Apple silicon with our industry, leading neural engines and our unwavering focus.

Timothy D. Cook: <unk> on privacy, which underpins everything we create.

Timothy D. Cook: As we push innovation forward, we continue to manage thoughtfully and deliberately through an uneven macroeconomic environment and remain focused on putting our users at the center of everything we do. Now, let's turn to our results for the March quarter across each product category, beginning with iPhone. iPhone revenue for the March quarter was $46 billion, down 10% year-over-year. We faced a difficult comparison over the previous year due to the $5 billion impact that I mentioned earlier.

Timothy D. Cook: As we push innovation forward, we continue to manage thoughtfully and deliberately through an uneven macroeconomic environment and remain focused on putting our users at the center of everything we do now.

Timothy D. Cook: Now, let's turn to our results for the March quarter across each product category beginning with iPhone.

Timothy D. Cook: IPhone revenue for the March quarter was $46 billion down.

Timothy D. Cook: Down 10% year over year.

Timothy D. Cook: We faced a difficult compare over the previous year due to the $5 billion impact that I mentioned earlier.

Timothy D. Cook: However, we still saw growth for iPhone in some markets, including mainland China, and according to Cantar, during the quarter, the two best-selling smartphones in urban China were the iPhone 15 and iPhone 15 Pro Max. I was in China recently, where I had the chance to meet with developers and creators who are doing remarkable things with iPhone. And just a couple of weeks ago, I visited Vietnam, Indonesia, and Singapore, where it was incredible to see all the ways customers and communities are using our products and services to do amazing things.

Timothy D. Cook: We still saw growth on iPhone in some markets, including mainland China and according to Kantar during the quarter. The two best selling smartphones in urban China were the iPhone <unk> and iPhone 15 Pro Max.

Timothy D. Cook: I was in China recently, where I had the chance to meet with developers and creators who are doing remarkable things with iPhone and just a couple of weeks ago, I visited Vietnam, Indonesia, and Singapore, where it was incredible to see all the ways customers and communities are using our products and services to do amazing things.

Timothy D. Cook: Everywhere I travel, people have such a great affinity for Apple, and it's one of the many reasons I'm so optimistic about the future. Turning to Mac, March quarter revenue was $7.5 billion, up 4% from a year ago. We had an amazing launch in early March with the new 13 and 15-inch MacBook Air. The world's most popular laptop is the best consumer laptop for AI with breakthrough performance of the M3 chip, and it has an even more powerful neural engine. Whether it's an entrepreneur starting a new business or a college student finishing their degree, users depend on the power and portability of MacBook Air to take them places they couldn't have gone without it.

Timothy D. Cook: Everywhere I travel people have such a great affinity for Apple and it is one of the many reasons I'm so optimistic about the future.

Timothy D. Cook: Turning to Mac March quarter revenue was $7 5 billion up 4% from a year ago, We had an amazing launch in early March with the new 13% and 15 inch Macbook Air.

Timothy D. Cook: World's most popular laptop is the best consumer laptop for AI with breakthrough performance of the M. Three chip and it's even more powerful neural engine.

Timothy D. Cook: Whether it's an entrepreneur starting a new business or a college student, finishing their degree users depend on the power and portability of Macbook Air to take them places they couldnt have gone without it.

Timothy D. Cook: In iPad, revenue for the March quarter was $5.6 billion, 17% lower year-over-year due to a difficult comparison with the momentum following the launch of the M2 iPad Pro and the 10th generation iPad last fiscal year. iPad continues to stand apart for its versatility, power, and performance. For video editors, music makers, and creatives of all kinds, iPad is empowering users to do more than they ever could with a tablet. Across wearables, home, and accessories, March quarter revenue was $7.9 billion, down 10% from a year ago due to a difficult launch compare on Watch and AirPods. Watch is helping runners go the extra mile on their wellness journeys, keeping hikers on course with the latest navigation capabilities in WatchOS 10, and enabling users of all fitness levels to live a healthier day.

Timothy D. Cook: And iPad revenue for the March quarter was $5 6 billion, 17% lower year over year due to a difficult compare with the momentum following the launch of M to iPad pro and the 10th generation iPad last fiscal year.

Timothy D. Cook: IPad continues to stand apart for its versatility power and performance for video editors music makers and Creatives of all times iPad is empowering users to do more than they ever could with a tablet.

Timothy D. Cook: Across Wearables home and accessories March quarter revenue was $7 9 billion.

Timothy D. Cook: <unk> down 10% from a year ago due to a difficult launch compare on watch and Airpods.

Timothy D. Cook: Apple watch is helping blenders go the extra mile on their wellness journeys keeping hikers on course with our latest navigation capabilities and Wacho as 10, and enabling users of all fitness levels to live a healthier day.

Timothy D. Cook: Across our watch lineup, we're harnessing AI and machine learning to power life-saving features like irregular rhythm notifications and fall detection. I often hear about how much these features mean to users and their loved ones, and I'm thankful that so many people are able to get help in their time of greatest need. As I shared earlier, we set an all-time revenue record in services with $23.9 billion, up 14% year-over-year. We also achieved all-time revenue records across several categories in geographic segments.

Timothy D. Cook: Across our watch lineup, we're harnessing AI and machine learning to power life saving features like irregular rhythm notifications and fall detection.

Timothy D. Cook: I often hear about how much. These features mean to users and their loved ones and I'm thankful that so many people are able to get help in their time of greatest need.

Timothy D. Cook: As I shared earlier, we set an all time revenue record and services with $23 $9 billion.

Timothy D. Cook: Up 14% year over year. We also achieved all time revenue records across several categories and geographic segments.

Timothy D. Cook: Audiences are tuning in on screens large, small, and spatial and are enjoying Apple TV Plus originals like Palm Royale and Sugar. And we have some incredible theatrical releases coming this year, including Wolfs, which reunites George Clooney and Brad Pitt.

Timothy D. Cook: Against this are tuning in on screens large small and spatial and are enjoying apple TV plus originals like palm Royale and sugar.

Timothy D. Cook: And we have some incredible theatrical releases coming this year, including dwarfs, which reunites George Clooney and Brad Pitt.

Timothy D. Cook: Apple TV plus productions continue to be celebrated as major awards contenders since launch Apple TV plus productions have earned more than 2100 award nominations and 480 wins.

Timothy D. Cook: [inaudible] Since launch, Apple TV Plus productions have earned more than 2,100 award nominations and 480 wins. Meanwhile, we're enhancing the live sports experience with a new iPhone app, AppleSport. This free app allows fans to follow their favorite teams and leagues with real-time scores, stats, and more.

Timothy D. Cook: Meanwhile, we are enhancing the live sports experience with a new iPhone App Apple sports. This free App allows fans to follow their favorite teams and leagues with real time scores stats and more <unk>.

Timothy D. Cook: Apple Sports is the perfect companion for MLS Season Pass subscribers. Turning to retail, our stores continue to be vital spaces for connection and innovation. I was delighted to be in Shanghai for the opening of our latest flagship store. The energy and enthusiasm from our customers was truly something to behold. And across the United States, our incredible retail teams have been sharing Vision Pro demos with customers, delighting them with the profound and emotional experience of using it for the very first time.

Timothy D. Cook: Apple Sports is the perfect companion for MLS season pass subscribers.

Timothy D. Cook: Turning to retail our stores continued to be vital spaces for connection and innovation I was delighted to be in Shanghai for the opening of our latest flagship store the energy and enthusiasm from our customers was truly something to be hold.

Timothy D. Cook: And across the United States are incredible retail teams had been sharing vision <unk> with customers delighting them with the profound and emotional experience of using it for the very first time.

Timothy D. Cook: Everywhere we operate and everything we do, we're guided by our mission to enrich users' lives and leave the world better than we found it. Whether we're making Apple podcasts more accessible with a new transcripts feature or helping to safeguard iMessage users' privacy with new protections that can defend against advances in quantum computing.

Timothy D. Cook: Everywhere, we operate and everything we do we're guided by our mission to enrich users' lives and leave the world better than we found it.

Timothy D. Cook: Whether we're making apple podcasts more accessible with a new transcripts feature or helping to safeguard I message users' privacy with new protections that can defend against advances in quantum computing.

Timothy D. Cook: Our environmental work is another great example of how innovation and our values come together. As we work toward our goal of being carbon neutral across all of our products by 2030, we are proud of how we've been able to innovate and do more for our customers while taking less from the planet. Since 2015, Apple has cut its overall emissions by more than half, while revenue grew nearly 65% during that same time period.

Timothy D. Cook: Our environmental work is another Great example of how innovation and our values come together as we work toward our goal of being carbon neutral across all of our products by 2030, we are proud of how we've been able to innovate and do more for our customers, while taking less from the planet.

Timothy D. Cook: Since 2015, Apple has cut our overall emissions by more than half while revenue grew nearly 65% during that same time period.

Timothy D. Cook: And we're now using more recycled materials in our products than ever before. Earlier this spring, we launched our first ever product to use 50% recycled materials, the M3-powered MacBook Air. We're also investing in new solar and wind power in the U.S. and Europe, both to power our growing operations and our users' devices. And we're working with partners in India and the US to replenish 100% of the water we use in places that need it most, with a goal of delivering billions of gallons of water benefits over the next two decades.

Timothy D. Cook: And we're now using more recycled materials in our products than ever before.

Timothy D. Cook: Earlier this spring, we launched our first ever product to use 50% recycled materials with a new in three powered Macbook air.

Timothy D. Cook: We're also investing in new solar and wind power in the U S and Europe.

Timothy D. Cook: To power, our growing operations and our users devices.

Timothy D. Cook: And we're working with partners in India, and the U S to replenish 100% of the water we use in places that need it most with the goal of delivering billions of gallons of water benefits over the next two decades.

Timothy D. Cook: Through our Restore Fund, Apple has committed $200 million to nature-based carbon removal, and last month, we welcomed two supplier partners as new investors who will together invest up to an additional $80 million in the fund. Whether we're enriching the lives of users across the globe or doing our part to be a force for good in the world, we do everything with a deep sense of purpose at Apple. And I'm proud of the impact we've already made at the halfway point in a year of unprecedented innovation.

Timothy D. Cook: Through our restore fun Apple has committed $200 million to nature based carbon removal projects and last month, we welcomed two supplier partners as new investors, who will together invest up to an additional $80 million in the fund.

Timothy D. Cook: Whether we're enriching lives of users across the globe are doing our part to be a force for good in the world. We do everything with a deep sense of purpose that Apple and I am proud of the impact we've already made at the halfway point in a year of unprecedented innovation.

Timothy D. Cook: I couldn't be more excited for the future we have ahead of us, driven by the imagination and innovation of our teams and the enduring importance of our products and services in people's lives. With that, I'll turn it over to Luca.

Timothy D. Cook: Couldnt be more excited for the future. We have ahead of us driven by the imagination and innovation of our teams and the enduring importance of our products and services in People's lives.

Timothy D. Cook: With that I'll turn it over to Luca.

Luca Maestri: Thank you, Tim, and good afternoon, everyone. Revenue for the March quarter was $90.8 billion, down 4% from last year; foreign exchange had a negative year over year impact of 140 basis points on our results. Products revenue was $66.9 billion, down 10% year over year. Due to the challenging compare on iPhone that Tim described earlier, which was partially offset by strength from mass.

Luca: Thank you Tim and good afternoon, everyone.

Luca Maestri: Revenue for the March quarter was $19 8 billion down 4% from last year.

Luca Maestri: Foreign exchange had a negative year over year impact of 140 basis points on our results.

Luca Maestri: Products revenue was $66 9 billion down 10% year over year.

Luca Maestri: Due to the challenging compare on iPhone that Tim described earlier, which was partially offset by strength from Mac.

Luca Maestri: And thanks to our unparalleled customer satisfaction and loyalty and a high number of customers who are new to our products, our installed base of active devices reached an all-time high across all products and all geographic segments. Services revenue set an all-time record of $23.9 billion, up 14% year-over-year, with record performance in both developed and emerging markets. Company gross margin was 46.6%, up 70 basis points sequentially, driven by cost savings and favorable mix to services, partially offset by leverage. Products gross margin was 36.6%, down 280 basis points sequentially, primarily driven by seasonal loss of leverage and mix, partially offset by favorable cost.

Luca Maestri: And thanks to our unparalleled customer satisfaction and loyalty and a high number of customers who are new to our products. Our installed base of active devices reached an all time high across all products in all geographic segments.

Luca Maestri: Services revenues had an all time record of $23 9 billion up 14% year over year with record performance in both developed and emerging markets.

Luca Maestri: Company gross margin was 46, 6% up 70 basis points sequentially, driven by cost savings and favorable mix to services, partially offset by leverage.

Luca Maestri: Services gross margin was 74.6%, up 180 basis points from last quarter due to a more favorable operating expenses of $14.4 billion. We're at the midpoint of the guidance range we provided and up 5% year over year. Net income was $23.6 billion, diluted EPS was $1.53 and a March quarter record, and operating cash flow was strong at $22.7 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue was $46 billion, down 10% year-over-year due to the almost $5 billion impact from a year ago that Tim described earlier. Adjusting for this one-time impact, iPhone revenue would be roughly flat to last.

Luca Maestri: Our iPhone active install base grew to a new all-time high in total and in every geographic segment. And during the March quarter, we saw many iPhone models as the top-selling smartphones around the world. In fact, according to a survey from Kantar, an iPhone was the top-selling model in the US, urban China, Australia, the UK, France, Germany, and Japan, and the iPhone 15 family continues to be very popular with customers.

Luca Maestri: 451 Research recently measured customer satisfaction at 99% in the US. Macro revenue was $7.5 billion, up 4% year over year, driven by the strength of our new MacBook Air powered by the M3 chip. Customers are loving the incredible AI performance of the latest MacBook Air and MacBook Pro models.

Luca Maestri: And our Mac install base reached an all-time high, with half of our MacBook Air buyers during the quarter being new to Mac. Also, customer satisfaction for Mac was recently reported at 96% in the US. iPad generated $5.6 billion in revenue, down 17% year over year, and iPad continues to face a challenging compare against the launch of the M2 iPad Pro and iPad 10 generation from last year. At the same time, the iPad install base has continued to grow and is at an all-time high.

Luca Maestri: As over half of the customers who purchased iPads during the quarter were new to the product, the latest reports from 451 Research indicate a customer satisfaction of 96% for iPad in the U.S. Wearables, Home, and Accessories revenue was $7.9 billion, down 10% year over year due to a difficult launch compare. Last year, we had the continued benefit of the launches of the AirPods Pro 2nd generation, the Watch SE, and the first Watch Ultra.

Luca Maestri: The Apple Watch continues to attract new customers, with almost two-thirds of customers purchasing an Apple Watch during the quarter being new to the product, sending the installed base to a new all-time high. And customer satisfaction was recently measured at 95% in the U.S.

Luca Maestri: In services, as I mentioned, total revenue reached an all-time record of $23.9 billion, growing 14% year-over-year, with our installed base of active devices continuing to grow at a nice pace. This provides a strong foundation for the future growth of the services business as we continue to see increased customer engagement with our ecosystem. Both transacting accounts and paid accounts reached a new all-time high, with paid accounts growing double digits year over year, and paid subscriptions showed strong double-digit growth.

Luca Maestri: We have well over 1 billion paid subscriptions across the services on our platform, more than double the number that we had only four years ago. We continue to improve the breadth and quality of our current services, from creating new games on Arcade and great new shows on TV+ to launching additional countries and partners for Apple Pay. Turning to enterprise, our customers continue to invest in Apple products to drive productivity and innovation.

Luca Maestri: We see more and more enterprise customers embracing demand. For example, in healthcare, Epic Systems, the world's largest electronic medical record provider, recently launched its native app for the Mac, making it easier for healthcare organizations like Emory Health to transition thousands of PCs to the Mac for clinical use.

Luca Maestri: And since the launch of Vision Pro last quarter, many leading enterprise customers have been investing in this amazing new product to bring spatial computing apps and experiences to life. We are seeing so many compelling use cases, from aircraft engine maintenance training at KLM Airlines to real-time team collaboration for racing at Porsche to immersive kitchen design at Lowe's.

Luca Maestri: We couldn't be more excited about the spatial computing opportunity in enterprise. Taking a quick step back, when we look at our performance during the first half of our fiscal year, total company revenue was roughly flat to the prior year, in spite of having one less week of sales during the period and some foreign exchange headwinds. We were particularly pleased with our strong momentum in emerging markets. As we said, we set first half revenue records in several countries and regions, including Latin America, the Middle East, India, Indonesia, the Philippines, and Turkey.

Luca Maestri: These results, coupled with double-digit growth in services and strong levels of gross margin, drove a first-half diluted EPS record of $3.71, up 9% from last year. Now, let me turn to our cash position and capital return program. We ended the quarter with $162 billion in cash and marketable securities. We repaid $3.2 billion in maturing debt, and commercial paper was unchanged sequentially, leaving us with total debt of $105 billion. As a result, its net cash was $58 billion at the end of the quarter.

Luca Maestri: During the quarter, we returned over $27 billion to shareholders, including $3.7 billion in dividends and equivalents and $23.5 billion through open market repurchases of 130 million Apple shares. Given the continued confidence we have in our business now and into the future, our board has authorized today an additional $110 billion for share repurchases as we maintain our goal of getting to net cash neutral over time. We're also raising our dividend by 4% to 25 cents per share of common stock.

Luca Maestri: And we continue to plan for annual increases in the dividend going forward, as we've done for the last 12 years. This cash dividend will be payable on May 16, 2024, to shareholders of record as of May 13, 2024.

Luca Maestri: As we move ahead into the June quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini 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. We expect our June quarter total company revenue to grow low single digits year over year, in spite of a foreign exchange headwind of about two and a half percent.

Luca Maestri: We expect our services business to grow double digits at a rate similar to the growth we reported for the first half of the fiscal year, and we expect iPad revenue to double. We expect gross margin to be between 45.5% and 46.5%. We expect OpEx to be between $14.3 billion and $14.5 billion, and we expect OI&E to be around $50 million. Excluding any potential impact from the mark to market of minority investments and our tax rate to be around 16% with that. Let's open the call.

Operator: Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please?

Operator: Certainly. We will go ahead and take our first question from Mike Ng of Goldman Sachs. Please go ahead.

Michael Ng: Hey, good afternoon. Thank you very much for the question. I have two.

Luca Maestri: First, I'll ask about the June quarter guidance. You know, the revenue outlook for low single-digit growth. I was wondering if you could run through some of the product assumptions, like what kind of gives you confidence around that? And then on the service momentum, what was better than expected in the quarter? And then I just have a quick follow-up.

Luca Maestri: Hey Mike, it's Luca. On the outlook, what we said is that we expect low single digits in total for the company. We expect services to grow double digits, at a rate that is similar to what we did in the first half of our fiscal year. And we also mentioned that iPad should grow double digits. This is the color that we're providing for the June quarter.

Luca Maestri: In services, we've seen very strong performance across the board. We mentioned, you know, we have records in several categories, in several geographic segments. It's very broad-based. You know, our subscription business is going well, transacting accounts and paid accounts are growing. Paid accounts are growing double digits. And also, we've seen really strong performance both in developed and emerging markets. So, we are very pleased with the way the services business is

Luca Maestri: Great, thank you. And I wanted to ask about... You know, as Apple leans more into AI and generative AI, should we expect any changes to the historical CapEx cadence that we've seen in the last few years of about 10 to $11 billion per year? Or any changes to, you know, how we may have historically thought about the split between tooling, data center, and facilities? Thank you very much.

Luca Maestri: We are all obviously very excited about the opportunity with GenAI. We obviously are pushing very hard on innovation on every front, and we've been doing that for many, many years. Just during the last five years, we have spent more than $100 billion on research and development. As you know, on the CapEx front, we have a bit of a hybrid model, where we make some of the investments ourselves. In other cases, we share them with our suppliers and partners.

Luca Maestri: On the manufacturing side, we purchase some of the tools and manufacturing equipment. In some other cases, our suppliers make the investment. And we do something similar on the data center side. We have our own data center capacity, and then we use capacity from third parties. It's a model that has worked well for us historically, and we plan to continue along the same lines going forward. Excellent. Thank you very much.

Wamsi Mohan: Our next question is from Wamsi Mohan with Bank of America. Please go ahead.

Timothy D. Cook: Yes, thank you so much. Tim, can you talk about the implications for Apple from the changes driven by EU DMA? You've had to open up third-party app stores. Clearly, this poses some security risks on the one hand, which can dilute the experience, but also lowers payments from developers to Apple. What are you seeing developers choose in these early days and consumers choose in terms of these third-party app stores? And I will follow up.

Timothy D. Cook: It's really too early to answer the question. We just implemented, in March, as you probably know, in the European Union, the alternate app stores and alternate billing, etc. So we're, You know, we're focused on complying while mitigating the impacts on user privacy and security that you mentioned. And so that's our focus.

Luca Maestri: Okay, thank you, Tim. And Luca, I was wondering if you could comment a bit on the product gross margins, the sequential step down you noted mix and leverage. Any more color on the mix? If you could share if customers are at all starting to mix down across product lines? Or is this more of a mix across product lines? Or just trying to get some color on customer behavior, given some of the broader inflationary pressures?

Luca Maestri: Thank you, on a sequential basis

Luca Maestri: On a sequential basis, yes, we were down. It's primarily the fact that we had a slightly different mix of products than the previous one. Obviously, leverage plays a big role as we move from the holiday quarter into a more typical quarter. So I would say primarily leverage and a different mix of products. We haven't seen anything different in terms of within the product categories. We haven't seen anything particular.

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

Timothy D. Cook: Great, thanks so much for taking my questions. Maybe my first one, Tim, you know, you've obviously mentioned your excitement around generative AI multiple times. I'm just curious how Apple is thinking about the different ways in which you can monetize this technology, because historically, software upgrades haven't been a big factor in driving product cycles. And so could AI be potentially different? How could that impact replacement cycles? Is there any services angle you'd be thinking? Any early color that you can share on that? And then I have a follow-up, please. Thanks.

Timothy D. Cook: I don't want to get in front of our announcements, obviously, but I would just say that we see generative AI as a very key opportunity across our product, and we believe that we have advantages that set us apart there, and so we'll be talking more about it in the weeks ahead.

Luca Maestri: Okay, that's very fair. Thank you.

Luca Maestri: And then Luca, maybe to just follow up on Wamsi's comments or question, you know, there's a broad concern about the headwind that rising commodity costs have on your product's gross margins. You know, wondering if you could just clarify for us, if we take a step back and look at all of the components and commodities that go into your products kind of collectively, are we, are you seeing these costs rising?

Luca Maestri: Are they falling? You know, what tools do you have to try to help mitigate some rising costs, if at all, rising costs, if at all? Thank you so much. Yes, I mean, during the last quarter, commodity costs, and in general.

Luca Maestri: Yes, I mean, during the last quarter, commodity costs and, in general, component costs have behaved favorably to us. On the memory front, prices are starting to go up; they've gone up slightly during the March quarter. But in general, I think it's been, you know, a period, not only this quarter, but the last several quarters where, you know, commodities have behaved well for us. Commodities go in cycles, and so there's obviously always that possibility.

Luca Maestri: Commodities going cycles, and so there's obviously always that possibility keep in mind that we are starting from.

Luca Maestri: Keep in mind that we are starting from a very high level of gross margins. We reported 46.6%, which is something that we haven't seen in our company in decades. And so we're starting from a good point. As you know, we try to buy ahead when, you know, the cycles are favorable to us. So we will try to mitigate if there are headwinds. But in general, we feel, particularly for this cycle, we are in good shape.

Luca Maestri: By ahead, when the cycles are favorable to us and so we would try to mitigate that are that are headwinds.

Speaker Change: Thank you so much.

Benjamin Alexander Reitzes: Our next question is from Ben Reitzes with Mellius. Please go ahead.

Luca Maestri: Our next question is from Ben Reitzes with Elliott. Please go ahead.

Timothy D. Cook: Hey, thanks for the question, and hey Tim, I was wondering if there was any more color from your visit there that gives you confidence that you've reached a bottom there and that it's turning, and I know you've continued to be confident there in the long term, and just wondering if there was any color as to when you think that the tide will turn there. Thanks a lot, and I have a follow-up.

Timothy D. Cook: When you think the tide turns there thanks, a lot and I have a follow up.

Timothy D. Cook: Now, Ben, if you look at our results in Q2 for Greater China, we were down eight. That's an acceleration from the previous quarter in Q1, and the primary driver of the acceleration was iPhone. And if you then look at iPhone within mainland China, we grew on a reported basis that's before any kind of normalization for the supply disruption that we mentioned earlier. And if you look at the top selling smartphones, the top two in urban China are iPhones.

Timothy D. Cook: And if you if you then look at iPhone within.

Timothy D. Cook: Any kind of normalization for the supply disruption that we.

Timothy D. Cook: And if you look at the top selling.

Timothy D. Cook: Smartphones the top two in urban China, our iphones.

Timothy D. Cook: And while I was there, it was a great visit, and we opened a new store in Shanghai, and the reception was very warm and highly energetic. And so I left there having had a fantastic trip and enjoyed being there, and so I maintain a very positive view of China in the long term. I don't know how each and every quarter goes and each and every week, but over the long haul, I have a very positive viewpoint.

Timothy D. Cook: And while it while I was there it.

Timothy D. Cook: It was a great visit.

Timothy D. Cook: Highly energetic and so.

Timothy D. Cook: Aye.

Timothy D. Cook: Left they are having a fantastic trip.

Timothy D. Cook: And enjoyed being there.

Timothy D. Cook: I maintained.

Timothy D. Cook: Great view.

Timothy D. Cook: <unk> in China in the long term I don't know how each and every quarter goes in each and every week.

Timothy D. Cook: Over the long haul.

Timothy D. Cook: Okay, hey, thanks, Tim. And my follow up, you know, I want to ask this carefully, though, it's a, there's a there's a fear out there that, you know, you may lose some graphic acquisition, you know, revenue. And I was wondering if you thought, you know, AI from big picture, and it doesn't have to be, you know, on a long term basis, I mean, from a big picture of AI is an opportunity for you to, you know, continue to monetize your mobile real estate, just how you how maybe investors can think about that from a big picture, just given that's been one of the concerns, that's potentially been an overhang, of course, due to, you know, a lot of the news and the media around some of the legal cases.

Timothy D. Cook: Continue to monetize your mobile real estate and just how you how maybe investors can think about that from a big picture just given.

Timothy D. Cook: That's been one of the concerns.

Timothy D. Cook: And I was wondering if there's just a little bit of a big picture color you could give that makes us kind of think about it better and your ability to sort of continue to monetize that real estate. Thanks a lot.

Timothy D. Cook: I think AI, the gender of AI, and AI both are big opportunities for us across our products, and we'll talk more about it in the coming weeks, but I think there are numerous ways there that are great for us, and we think that we're well positioned.

Timothy D. Cook: Thanks, Tim. Yep.

Krish Sankar: Our next question is from Krish Sankar with TD COED. Please go ahead.

Krish Sankar: Krish Sanka with Cowen. Please go ahead.

Timothy D. Cook: Hi, thanks for taking my question. Again, sorry to beat the AI horse, but Tim, I know you don't want to reveal a lot, but I'm just kind of curious because last quarter you spoke about how you're getting traction in enterprise. Is the AI strategy going to be both consumer and enterprise, or is it going to be one after the other? Any kind of feedback would be helpful and then a follow up for Luca.

Krish Sankar: Yes, hi, Thanks for taking my question again, sorry to beat the AI.

Timothy D. Cook: But Tim I know you don't want to reveal a lot, but I'm just kind of curious because last quarter you spoke about how we're getting traction in the enterprise.

Timothy D. Cook: Our focus on enterprise has been, and you know, through the quarter and in the quarters that preceded it, on selling iPhones and iPads and Macs, and we recently added Vision Pro to that, and we're thrilled with what we see there in terms of interest from big companies buying some to explore ways they can use them, and so I see enormous opportunity in the enterprise. I wouldn't want to confine that to AI only. I think there's a great opportunity for us around the world in enterprise.

Timothy D. Cook: Our focus on enterprise.

Timothy D. Cook: Has it been.

Timothy D. Cook: Through the quarter and the quarters that preceded it on on selling iphones and ipads and Macs.

Timothy D. Cook: They are in terms of interest from big companies.

Timothy D. Cook: Buying some to two.

Timothy D. Cook: And so I see enormous opportunity in the enterprise I wouldn't want to cabin that too.

Timothy D. Cook: <unk>.

Luca Maestri: Got it, very helpful. And then for Luca, you know, I'm kind of curious about, given the macro environment on the hardware side, are you seeing a bias towards the standard iPhone versus the pro model? The reason I'm asking the question is that there is a weaker consumer spending environment, yet your services business is still growing and has amazing growth margins. So I'm just trying to, square the circle over there.

Luca Maestri: Given the macro environment on the hardware side are you seeing a bias towards like standard iPhone with the pro model. The reason I'm asking the question is that there's a vehicle consumer spending environment.

Luca Maestri: I'm not sure I fully understand the question. But in general, what we are seeing on the product side, we continue to see a lot of interest at the top of the range of our products, and I think it's a combination of consumers wanting to purchase the best products that we offer in the different categories and our ability to make those purchases more affordable over time. We've introduced several financing solutions, from installment plans to trading programs, that reduce the affordability threshold, and therefore, customers tend to buy and want to buy at the top of the range.

Luca Maestri: I'm not sure I.

Luca Maestri: And I think it's a combination of consumers wanting to purchase the best product that we offer into different categories and our ability to make those purchases more affordable overtime. We've introduced several financing solutions from installment plans with trading.

Luca Maestri: Programs that reduced affordability threshold, and therefore customers tend to buy and want to buy at the top of the range that is very valuable for us in developed markets, but particularly in emerging markets, where the affordability issues are more pronounced but in China over the last several years and that is also.

Luca Maestri: That is very valuable for us in developed markets but particularly in emerging markets where the affordability issues are more pronounced. But in general, over the last several years, and that is also reflected in our gross margins, over the last several years, we've seen this trend, which we think is pretty sustainable. Thank you very much, Luca.

Luca Maestri: <unk> in our gross margins.

Luca Maestri: College. Thank you very much, Luca. Thanks, Tim.

Amit Jawaharlaz Daryanani: Our next question is from Amit Daryanani with EverQuarter. Amit, please go ahead.

Luca Maestri: Our next question is from Amit <unk> with Evercore.

Luca Maestri: Thanks for taking my question out too, too. I guess first off on capital allocation, you know, you folks have about $58 billion of net cash right now. As you think about eventually getting to this net cash neutral target, do you think at some point Apple would be open to taking on leverage on the balance sheet and continuing the buyback program? Or is it more like once you get to this neutral position, it's going to be about returning free cash flow back to shareholders? I'd just wondering, how do you think about leverage on your balance sheet over time and what sort of leverage do you think you'd be comfortable taking on?

Amit Jawaharlaz Daryanani: Thanks for taking my question I have two as well I guess first off on capital allocation.

Luca Maestri: As you think about eventually get into this net cash neutral target.

Luca Maestri: Do you think at some point Apple would be open to taking on leverage on the balance sheet and continuing to buyback program or is it more like once you get to the neutral position that's going to be about returning free cash flow back to shareholders. I'm. Just wondering how do you think about leverage on your balance sheet over time and what the leverage do you think you'd be comfortable taking on.

Luca Maestri: Hey Amit, it's Luca. I would say one step at a time. We put out this target of getting to net cash neutral several years ago, and we're working very hard to get there. Our free cash flow generation has been very strong over the years, particularly the last few years, and so, as you've seen this year, we've increased the amount that we're allocating to the buyback. For the last couple of years, we were doing $90 billion.

Luca Maestri: Hey, Amit it's Luca.

Luca Maestri: I would say one step at a time.

Luca Maestri: We put out this target of getting to a net cash neutral several years ago and.

Luca Maestri: We're working very hard.

Luca Maestri: To get there our free cash flow generation has been very strong over the years, particularly the last few years and so as you've seen this year, we've increased the amount that we're allocating to the buyback.

Luca Maestri: Now we're doing $110 billion. So... Let's get there first. It's going to take a while. And then when we are there, we're going to reassess and see what is the optimal capital structure for the company at that point in time. Obviously, there are a number of considerations that we will need to look at when we get there.

Luca Maestri: But let's get there first it's going to take a while scale.

Luca Maestri: And then when we had there were going to reassess and see what is the optimal capital structure for the company at that point in time, obviously.

Luca Maestri: There's going to be a number of considerations that we really need to look at when we get there.

Amit Jawaharlaz Daryanani: There are enough affiliates who are trying anyway. If I go back to this China discussion a bit, and Tim, I think your comments around the growth of iPhones and memes in China are really notable. Could you step back?

Speaker Change: Fair enough I figured we're trying anyway.

Timothy D. Cook: I mean, these numbers are still declining in greater China on a year-over-year basis and aggregate. Maybe just talk about what you are seeing from a macro basis in China? And then at least the annual decline or year-over-year decline that we're seeing, do you think it's more macro-driven or more competitive-driven over there? That would be helpful. Yeah, I can only tell you what we're seeing. And so I don't want to

Timothy D. Cook: Yeah, I can only tell you what we're seeing. And so I don't want to present myself as an economist.

Timothy D. Cook: I don't want to present myself as a.

Timothy D. Cook: So I'll steer clear of that from what we saw was an acceleration from Q1. And it was driven by iPhones, and iPhones in mainland China before we adjust for this 5 billion impact that we talked about earlier did grow. That means the other products didn't fare as well, and so we clearly have work there to do. I think it has been, and is through last quarter, the most competitive market in the world, and I, so, I wouldn't say anything other than that I've said that before, and I believe that it was last quarter as well. But if you step back from the, The 90 day cycle.

Timothy D. Cook: Economists.

Timothy D. Cook: I'll steer clear of that from <unk>.

Timothy D. Cook: What we saw was.

Timothy D. Cook: And iPhone in mainland China, before we adjust or this $5 billion impact that we talked about earlier.

Timothy D. Cook: Did grow.

Timothy D. Cook: I think it has been and is.

Timothy D. Cook: Through last quarter.

Timothy D. Cook: The most competitive market in the world.

Timothy D. Cook: And.

Speaker Change: I see.

Timothy D. Cook: We didn't say anything other than that I've said that before.

Timothy D. Cook: What I see is a lot of people moving into the middle class. We try to serve customers very well there and have a lot of happy customers, and you can kind of see that in the latest store opening over there. And so I continue to feel very optimistic.

Timothy D. Cook: <unk> tried to serve customers very well there.

Timothy D. Cook: Have a lot of happy customers and you can kind of see that in.

David Vogt: Our next question is from David Vogt with UBS. Please go ahead.

David Vogt: Great. Thanks, guys, for taking my question. I'm going to roll the two together so you guys have them both.

David Vogt: Great. Thanks, guys for taking my question I'm going to enroll the two together. So you guys have them both.

David Vogt: So, you know, Luca, obviously, I'm trying to parse through the outlook for the June quarter. And just based on the quick math, it looks like, all things being equal, given what you said, the iPhone business is going to be down mid single digits again.

David Vogt: Things being equal given what you said the iPhone businesses can be down mid single digits again in the June quarter, and if that's the case and maybe this is for Ken obviously, how are you thinking about the competitive landscape in the context of what you just said maybe outside of China, and what changes sort of the.

Timothy D. Cook: And if that's the case, and maybe this is for Tim, you know, obviously, how are you thinking about the competitive landscape in the context of what you just said, maybe outside of China? And what changes, you know, consumer demand or receptivity to new devices, because we've been in this malaise for a while? Is it really this AI initiative that a lot of companies are pursuing, and do you think that changes the sort of demand drivers going forward?

Timothy D. Cook: The consumer demand or receptivity to new devices, because we've been in this malaise for a while is it really this AI initiative that a lot of companies are pursuing and do you think that changes sort of the demand drivers going forward or is it just really more of a timing issue in terms of the replacement cycle is a little bit long in the tooth and we see a bit of an upgrade cycle at some.

Timothy D. Cook: Or is it just really more of a timing issue in terms of the replacement cycle being a little bit long in the tooth, and we see a bit of an upgrade cycle at some point, maybe later this year into next year, I think?

Timothy D. Cook: Point, maybe later this year into next year. Thanks.

Luca Maestri: I do see a key opportunity, as I mentioned before, with generative AI on all of our devices or the vast majority of our devices. And so I think that if you look out. That's not within the next quarter or so, and we don't guide at the product level, but I'm extremely optimistic. And so that's kind of how I view it in terms of the outlook. I'll let Luca comment on the outlook portion of it. I think if you step back on iPhone, though, and you make this adjustment from the previous year, our Q2 results would be flat on iPhone, and so that's how we performed in Q2.

Speaker Change: I do see.

Luca Maestri: A key opportunity as I've mentioned before with generative.

Luca Maestri: With.

Luca Maestri: All of our devices are the vast majority of our devices.

Luca Maestri: That's not within the next quarter or so and we don't guide it.

Luca Maestri: At the product level, but I, but.

Luca Maestri: Extremely optimistic.

Luca Maestri: And so that's kind of how I view it in terms of I'll, let luka comment on the.

Luca Maestri: Outlook portion of it I think if you step back on iPhone, though.

Luca Maestri: You may.

Luca Maestri: This adjustment from the previous year.

Luca Maestri: Our Q2 results would be.

Luca Maestri: On iPhone.

Luca Maestri: And so thats, how we performed in Q2.

Luca Maestri: Yeah, David, I'll only repeat what we said before about the outlook. And this is the color that we're providing for for the quarter. We do expect growth in total, low single digits. We do expect services to grow double digits, and we expect iPad to grow double digits for the rest. I'll let you make assumptions, and then we will report back three months from now. Great. Thanks, guys. I'll get back on the queue.

Luca Maestri: Yes, David.

Luca Maestri: The outlook I'll only repeat what we said before and this is the color that we provided for the quarter, we do expect to growing total low single digits. We.

David Vogt: We do expect services to grow double digits, and we expect ipads to grow double digits for the rest I'll, let you make assumptions and then we will report three months from now.

Speaker Change: Great. Thanks, guys I'll get back in the queue.

Speaker Change: Thanks, David Operator, we'll take the next question please.

Samik Chatterjee: Our next question is from Samik Chatterjee with JPMorgan. Please go ahead.

Luca Maestri: Our next question is from stomach chatterji with J P. Morgan. Please go ahead.

Samik Chatterjee: Hi, Thanks for taking my question.

Luca Maestri: Your services growth accelerated from 11% to 14%. If you can sort of dig into the drivers of where or which parts of services you really saw that acceleration and why it isn't a bit more sustainable as we think about the next quarter, because I believe you're guiding more to sort of averaging out the first half of the year for the next quarter. So just curious, what were the drivers, and why not have it a bit more sustainably sort of improve as we go through the remainder of the year? I have a quick follow-up. Thank you.

Luca Maestri: If you can sort of dig into the drivers of where or which parts of services did you really see that acceleration and why it isn't a bit more sustainable as we think about the <unk>.

Luca Maestri: Next quarter, because I believe you are guiding more to sort of averaging out the first half of the yield for the next quarter. So just curious what were the drivers then why not have it a bit more sustainably improve as we go through the remainder of deal I have a quick follow up thank you.

Luca Maestri: Drive safely. Thanks. Bye. Bye. Bye.

Luca Maestri: So, a number of things about services. First of all, the overall performance was very strong. As I said earlier, all-time records in both developed and emerging markets, so we see our services do well across the world. Records in many of our service categories. There are some categories that are growing very fast also because they are relatively smaller in the scheme of a services business, like cloud and video payment services. You know, those all set all-time revenue records, and so we feel very good about the progress that we're making in services. As we go forward, I'll just point out that if you look at our growth rates a year ago, they improved during the course of the fiscal year.

Luca Maestri: So a number of things on services first of all the overall performance was very strong.

Luca Maestri: As I said earlier, all time records in both developed and emerging markets. So we see our services do well across the world.

Luca Maestri: Records in many of our services categories.

Luca Maestri: There are some categories that are growing very fast also because they are relatively smaller in the scheme of our services business, like cloud, video, payment services.