Home / Business / Tim Cook, CEO of Apple Inc. (AAPL), on second quarter 2020 earnings – earnings call transcript

Tim Cook, CEO of Apple Inc. (AAPL), on second quarter 2020 earnings – earnings call transcript



Apple Inc. Second Quarter 2020 Results Conference Call (NASDAQ: AAPL) April 30, 2020, 5:00 p.m. ET

Company participants

Tejas Gala – Senior Manager, Corporate Finance and IR

Tim Cook – managing director

Luca Maestri – CFO

Conference call participants

Shannon Cross – Cross Research

Wamsi Mohan – Bank of America

Katy Huberty – Morgan Stanley

Amit Daryanani – Evercore

Jeriel Ong ̵

1; Deutsche Bank

Samik Chatterjee – JP Morgan

Chris Caso – Raymond James

operator

Hello everyone. Welcome to the Apple Incorporated earnings conference call for the second quarter of fiscal 2020. Today’s call is being recorded.

At this point I would like to forward the call to Mr. Tejas Gala, Senior Manager, Corporate Finance and Investor Relations, to open comments and introductions. Please continue.

Tejas gala

Thanks a lot. Hello and thank you for coming to us.

Today Apple’s CEO Tim Cook speaks first, followed by CFO Luca Maestri. After that, we will open the call for questions from analysts.

Please note that some of the information you will hear during our discussion today is made of forward-looking statements, including but not limited to income, gross margin, operating costs, other income and expenses, taxes, capital allocation and future business prospects, including the possible ones Effects of COVID-19 on the company’s business and results of operations.

Actual results or trends may differ materially from our forecast. For more information, see the risk factors discussed in Apple’s recent Form 10-K and Form 10-Q regular reports, Form 8-K filed with the SEC today, and the related press release.

Apple undertakes no obligation to update any forward-looking statements or information that is current as of the date.

I would now like to forward the call to Tim for introductory remarks.

Tim cook

Thank you, Tejas. Good evening everyone. Thank you for joining us today. I hope you stay safe and sound.

Today Apple reports sales of $ 58.3 billion, a record for services and a quarterly record for wearables, home and accessories. It was also a quarterly sales record for Apple Retail that was driven by phenomenal growth in our online store. In the toughest global environment we’ve ever run our business in, we’re proud that Apple grew in the quarter.

Before we go into the numbers in more detail, however, I would like to take a brief look at COVID-19. This is something Apple has struggled with since January. And I think how we reacted, what we were inspired to tell an important story about the durability of Apple as a company and the lasting importance of our products for the lives of our customers. It also speaks for Apple’s unmatched ability to be creative, always think long-term and move forward when others feel the instinct to withdraw.

Before COVID-19 was in sight, we expected the second quarter to be a productive and energetic phase for Apple. And when the pandemic broke out, our teams not only managed to grow their business, launch powerful new products, and meet our customers’ needs, but they also got the opportunity to meet our broader commitments to the communities in which we operate are living and working.

Let’s take a quick look at the business. At the same time, as they left no stone unturned to get our latest generation of devices in the hands of our customers, our global network of supply chain partners, logistics and operations staff sourced more than 30 million masks for medical professionals in all parts of the company Front to ensure that they are donated to places with the greatest need in every region of the world.

While our product teams were preparing to launch a new iPad Pro, Magic Keyboard, MacBook Air, and new iPhone SE, which were well received by reviewers and consumers alike, they also worked with our suppliers to design, test, Manufacture and distribution of more than 7.5 million face shields, of which we continue to ship more than 1 million weekly to frontline doctors, nurses and medical staff.

In a quarter in which our service teams achieved strong growth, which Luca will focus on in a minute and which speaks for the actual durability of our service strategy, these teams also focused on COVID-19. When Apple News reached 125 million active users per month, we increased trustworthy information from reliable sources through a dedicated COVID-19 industry.

We let customers skip payments without paying interest on the Apple Card for March and April as many families have financial difficulties. We worked with everyone from Oprah to Lady Gaga to inform, entertain and give back on Apple TV. Services such as FaceTime and Messages set new records for daily volume this quarter as users could rest assured that their devices would stay connected in a new reality.

In the software, at the same time that we are preparing to hold our first worldwide online developer conference later this quarter, our teams worked with the same creativity and speed to compile our COVID-19 symptom, reviewing the website and app in collaboration with the CDC. To date, the app has been installed almost 2 million times and the web tool has received over 3 million unique visits. To speed up contact tracking, we are starting to use Bluetooth technology with Google this month to help governments and health agencies reduce the spread of the virus, with the focus on user privacy and security.

We have combined this programmatic effort with a broader strategy to return to where it is most needed. We have made large corporate donations to respond to the support of global citizens around the world, as well as a new fund for Americans who are suffering from food insecurity as a result of the crisis. When you settle these things and consider our ongoing 2: 1 match for employee donations, Apple’s contributions to the global response are significant, diverse, and a great source of pride for the entire chain.

We also do everything we can to help our employees, their families, and thus their communities, to stay safe and healthy, by changing our processes if necessary. Of course, this also applies to our retail employees, their Apple area for our customers and a significant part of our business, and we normally compensate them despite the store closings.

In a quarter where circumstances change by the hour, we were pleased with the resilience and adaptability of our global supply chain. While we experienced some temporary delivery bottlenecks in February, our operations team, suppliers and manufacturing partners returned safely to work and production was back to typical levels towards the end of March.

In this time of social distance, closed school and meeting places, late plans and new ways of socializing, we have seen significant evidence that our products have taken on new meaning for customers. Teachers and students around the world rely on our technology to teach, learn and stay connected. We are in the process of placing major orders for iPads in school systems to sustain learning at a distance, including tens of thousands in Ontario, Canada. Glasgow, Scotland and Puerto Rico, 100,000 to Los Angeles and 350,000 to New York City, our largest ever educational iPad deployment.

Since early March, students, enthusiasts, and creatives have seen unprecedented demand for a pro app. These people keep us all entertained and inspired when we stay home. And to help them do that, we’ve made Final Cut Pro X and Logic Pro X free for everyone for 90 days. The response was overwhelming and resulted in software downloads and uses being brought to record levels.

Physicians and medical professionals are making even greater use of Apple Watch and other health functions to communicate with patients and treat them remotely when needed. With the new FDA guidelines for non-invasive remote monitoring of patients, for example, the ECG app on the Apple Watch is increasingly being used to simplify remote ECG measurements and recordings for use in telemedicine and the contact and exposure of patients and Reduce healthcare providers. Many hospitals such as the Geisinger Health System, NYU Langone Health and Stanford Health Care use apps on iPad and iPhone to support communication and video conferencing between hospital patients and their care teams. In this way, the nursing teams can closely monitor the patients without having to enter isolation rooms. This helps minimize exposure and reduces the need for personal protective equipment.

Now if you take a step back and summarize all of this, considering how COVID-19 touched Apple, our customers, and how we work, this may not have been the quarter in which this pandemic could have been missing, but I don’t think so that I can remember a quarter where I was proud of what we do or how we do it.

As I said at the beginning, we had sales of $ 58.3 billion, including product sales of $ 45 billion. Our product business developed in three very different phases in the March quarter. Given Apple’s performance in the first five weeks of the quarter, we were confident that we would head for a record second quarter at the very high end of our expectations. In the next five weeks of the quarter, when COVID-19 affected China, the iPhone supply and demand for our products in China were temporarily affected. This led us to withdraw our sales forecast in February. At that time, the demand for our products outside of China was still strong and met our expectations. In the last three weeks of the quarter, when the virus spread worldwide and social distancing measures were taken worldwide, including the closure of all of our retail stores outside of Greater China on March 13th and many distributors from distributors around the world, particularly on iPhone and We saw wearables push downward in demand.

Given the lack of visibility and short-term uncertainty, we will not issue guidelines for the coming quarter. In the long term, however, we have a high degree of trust in the lasting strength of our business. Our global supply chain is extremely durable and resilient. We have shown that we are able to deal with and manage temporary supply problems such as those caused by COVID-19. We continued to deliver innovative new products in various categories that appeal to a wide range of customers, including the brand new iPhone SE, which has achieved unmatched technological capacity at an unbelievable price.

Our teams around the world have tackled the complexity of this moment with unmatched creativity, good humor and commitment to our customers. For a company whose business innovation it is, there are real benefits to having to find out regularly how to do almost everything in a brand new way.

Our long-term investment in our service strategy is successful. This business grows and reflects our continued large and growing installed base. We assume that we will achieve our long-term goal of doubling our sales of services for the 2016 financial year in 2020. We have always operated Apple on a long-term basis. We entered this period with an unmatched financial burden, a robust cash position and our best product pipeline ever.

Major investments, including our five-year commitment to contribute $ 350 billion to the economy here in the United States, are making full progress. In these moments we deal with each other. We have always made it through difficult moments by doubling and investing in the next generation of innovations. And that is our strategy today.

While we cannot say for sure how many chapters there are in this book, we can be sure that the end will be good. Apple will continue to do everything we can to support the global response and keep our customers learning, creating, sharing and connecting so that life remains as normal as possible in this challenging time.

With this I hand things over to Luca.

Luca Maestri

Thank you, Tim. Good evening everyone.

It was a completely different quarter than we expected when we last spoke to you at the end of January. However, we couldn’t be more proud of our Apple teams around the world, our role in helping local communities and our partners across the value chain, and the resilience of our business and financial performance in these challenging times.

Revenue for the quarter was $ 58.3 billion, up 1% year over year despite the extreme circumstances surrounding the impact of COVID-19 and a headwind of 100 basis points from foreign exchange. Product sales were $ 45 billion, a decrease of 3%.

After a very strong January, our performance was particularly impacted in the last three weeks of the quarter, when store closures and closings increased due to the global spread of COVID-19 and affected our product sales. However, on a demand basis, our performance was stronger than our reported results, as we reduced the iPhone channel inventory more than a year ago. It is important that our installed base of active devices has reached an all-time high in all of our geographic segments and all important product categories.

Sales of services followed a different trend with very strong growth of 17% compared to the previous year. In many of our service categories and in most of the countries we track, we have set a new record of $ 13.3 billion in sales. I will give more details later.

The company’s gross margin was 38.4% and remained unchanged sequentially. Cost savings and a shift in the mix towards services were offset by the seasonal loss of leverage. The gross margin of the products was 30.3%, falling 380 basis points sequentially due to the loss of leverage and the unfavorable mix. This decrease was more pronounced than under normal circumstances due to the previously mentioned COVID-19 effects.

The gross margin for services was 65.4%, increasing 100 basis points sequentially, due to a favorable mix. Our reported tax rate for the quarter was 14.4%. This was below our forecast of 16.5% due to one-off, discrete items.

Net income was $ 11.2 billion and earnings per share were $ 2.55, an increase of 4%. Operating cash flow was very high at $ 13.3 billion, an improvement of $ 2.2 billion year on year.

Let me go into more detail for each of our sales categories.

IPhone sales of $ 29 billion decreased 7% year-on-year as both the supply and demand of the iPhone were impacted by the effects of COVID-19 at some point in the quarter.

On the supply side, we had some temporary supply bottlenecks in February, but were extremely pleased with the resilience and adaptability of our global supply chain, and the ability to get people back to work safely when circumstances permit. Our operations team and manufacturing partners have made extraordinary efforts to quickly restore production and we have left the quarter in good delivery position for most of our product lines.

On the demand side, after a very strong first five weeks, we saw the impact of COVID-19 on demand in China for the next five weeks and then in the last three weeks of the quarter worldwide, when lockdowns and point closings became more widespread in many countries.

While we saw a slight extension of our exchange cycle towards the end of the quarter, which we attribute to the widespread closings of sales outlets, our actively installed base of iPhones has reached an all-time high. This speaks for the quality of our products and the strength of our ecosystem. In the United States, the latest 451 Research consumer survey found that iPhone 11, 11 Pro and 11 Pro Max iPhone customer satisfaction levels totaled 99%.

Let us turn to the services. We had record sales of $ 13.3 billion and consistently strong performance. We’ve had sales records on the App Store, Apple Music, Video, Cloud Services, and our App Store search ad business. We also set a record for AppleCare in the March quarter. Our new services, Apple TV Plus, Apple Arcade, Apple News Plus and Apple Card, continue to add users, content and features while contributing to the overall growth of the services.

As Tim mentioned earlier, we are well on track to achieve our goal of doubling our revenue with 16 tax services in 2020.

Revenue in the App Store grew strongly in double digits thanks to robust customer demand for in-app purchases and subscriptions. Our third-party subscription business grew in multiple categories, increasing over 30% year over year to a new all-time high. Our first-party subscription services also continued to perform very well. Apple Music and Cloud Services both set a sales record and AppleCare set a record for the March quarter. The paid subscriptions for all three services were strong double digits.

Customer loyalty in our ecosystem continues to grow strongly, and the number of transactions and paid accounts in our digital content stores reached a new all-time high in the March quarter. In particular, the number of paid accounts rose in double digits in all of our geographic segments. We now have over 515 million paid subscriptions to all services on our platform, 125 million more than a year ago. Subscriptions paid rose sequentially by over 35 million. This is the highest sequential growth we have ever seen. With this momentum, we are confident that we will reach our increased target of 600 million paid subscriptions before the end of the 2020 calendar.

Wearables, Home and Accessories had a record $ 6.3 billion in sales in the March quarter, up 23% year over year, with strong double-digit performance in all five geographic segments.

Our wearables business is now the size of a Fortune 140 company and we are very excited about the many opportunities that we have in this product category. For example, Apple Watch continues to expand its reach as over 75% of customers who purchased Apple Watch worldwide in the quarter were new to the product.

Next I want to talk about Mac and iPad. Mac sales were $ 5.4 billion. IPad sales were $ 4.4 billion. Towards the end of the quarter, we launched a brand new iPad Pro that includes a premium LiDAR scanner with some really exciting augmented reality applications. and MacBook Air with significantly improved performance at a lower price. We are very happy about the strong customer interest in both products.

It is important that around half of the customers who bought Macs and iPads worldwide in the quarter were new to this product and the actively installed base for Mac and iPad reached a new all-time high. In the latest 451 Research consumer surveys, customer satisfaction was measured at 95% for the iPad and 96% for the Mac.

Everywhere in the corporate market, companies have made the transition to remote work. We created content to help our customers make the transition, including an on-demand video learning series that focuses on topics such as remote iPad and Mac deployments and security. We have also realigned our own retail and corporate teams to provide timely and relevant support to customers navigating new work environments. Some of our largest customers, who offer employees like IBM and SAP Mac, were able to switch quickly so that employees could easily set up and secure their devices from home. This benefited from Apple Business Manager and touchless deployment.

And we’ve seen countless examples of new remote deployment projects that were implemented in just a few hours. For example, Peloton worked with our New York teams to deploy an entire fleet of Macs overnight so that their team could work remotely.

In key sectors such as food and financial services, companies have used our technology to serve their customers more securely. Leading groceries around the world like Trader Joe, Woolworths, Lawson, Sainsbury, Lidl and Carrefour offer Apple Pay so customers can use contactless payments. And as business evolves into fulfillment centers for online ordering, businesses are using apps for remote shoppers and grocery delivery to reduce pedestrian traffic.

In banking, where security and securities are top priorities, one way to protect corporate and customer information is to provide iOS devices for businesses to employees who use cell phones every day. For example, Bank of America is buying tens of thousands of additional iOS devices for its workforce.

Now let me come to our cash position.

First of all, I would like to point out that liquidity was not an issue for us under these extremely unusual financial market conditions. We have an exceptionally strong balance sheet, very deep access to the capital markets and unsurpassed free cash flow generation. We ended the quarter with $ 193 billion in cash plus marketable securities and total debt of $ 110 billion. As a result, the net present value at the end of the quarter was $ 83 billion. We returned $ 22 billion to shareholders in the March quarter, including $ 18.5 billion through buybacks of 64.7 million Apple shares in the open market and $ 3.4 billion in dividends and equivalents.

Finally, at the beginning of the June quarter, I want to show some color to what we’re seeing, including the types of forward-looking information that Tejas referred to at the start of the call.

As Tim mentioned earlier, given the lack of visibility and security, we won’t be issuing guidelines for the coming quarter in the near future. However, based on what we saw in April and how things could develop, I would like to give additional insights into the headwind and tailwind we are facing.

From a currency perspective, the US dollar has recently appreciated against most currencies worldwide. As a result, we expect our revenue to be negatively impacted by more than $ 1.5 billion year-over-year. Our global supply chain is back in operation. We are in a typical supply position, including our usual ramp for recently launched new products. These newly launched products, iPad Pro, MacBook Air and iPhone SE, have received excellent customer feedback even under these extreme circumstances.

For iPhone and wearables, we expect sales in the June quarter to deteriorate compared to the March quarter compared to the previous year. For iPad and Mac, we expect sales in the June quarter to improve compared to the previous year.

We see two different trends in services. First, customers are actively engaging with our ecosystem and digital services, and we believe that the very strong performance in the app store, video, music and cloud sectors will continue to continue in the June quarter. Second, services such as AppleCare and advertising are affected due to the overall decrease in economic activity due to global closures. AppleCare includes our product repair business and warranty agreements with our customers, which are apparently affected by store closures and less customer traffic. The advertising, which was made up of agreements with third parties, our App Store search ads, and Apple News ads, was impacted by general economic weakness and uncertainty about when companies would reopen.

In the gross margin, the sequential headwinds include foreign exchange, the mix within products, and the seasonal loss of leverage on our product business. Forex will impact 70 basis points sequentially and 130 basis points year over year. In the product mix, note the comment we made at sales level. Sequential tailwinds include cost savings and shifting the mix towards services.

Our approach to capital allocation remains unchanged. We continue to invest with confidence in our future, while giving back value to our shareholders. We are in the process of developing our most exciting product and service pipeline ever, while contributing over $ 350 billion to the US economy and expanding our presence in many cities across the country over a five-year period.

We continue to believe that our stock is high in value, and we are sticking to our goal of achieving a cash neutral position over time. As a testament to the confidence we have in our business today and in the future, our board has approved $ 50 billion in share buybacks in addition to the $ 40 billion remaining in the current share buyback plan. Our Board of Directors has also approved a 6% increase in our quarterly dividend and today approved a cash dividend of $ 0.82 per common share to be paid on May 14, 2020 to shareholders registered on May 11, 2020.

Finally, and above all, we manage Apple on a long-term basis, as we have always done. In times of uncertainty, we have historically continued to invest in business, and this remains our philosophy. We will continue to focus on what we do best, invest in our product and service pipeline, do business wisely, and take care of our teams and believe that we will emerge stronger.

Let’s open the call to questions.

Tejas gala

Thanks, Luca. We ask you to limit yourself to two questions. Operator, may have the first question, please?

Q&A session

operator

Yes. That will come from Shannon Cross, Cross Research.

Shannon Cross

Thank you for answering my question and I hope everyone is well. Tim, you talked about seeing an improvement in the second half of April. So I was wondering if you could talk a little bit more about the segment, a geographic base, what you see and the different regions you sell in and what you hear from your customers. And then I have a follow-up. Thanks a lot.

Tim cook

Sure, Shannon. If you look at that, I’ll start with China. If you look at what happened in China, we had a really good January. As you know, the blockade started there in late January. Demand fell sharply in February. We closed our shops in February. Since the closure is completed in mid-February towards the end of February, we start opening stores. We opened in stages, which took about 30 days to mid-March. Und aus Sicht der Nachfrage haben wir dann im März eine Verbesserung gegenüber Februar gesehen. Und wenn Sie sich ansehen, wo wir heute sind, haben wir im April eine weitere Verbesserung im Vergleich zum März gesehen. Und das ist China.

Wenn Sie sich den Rest der Welt ansehen, haben wir uns im Januar, den ersten fünf Wochen des Quartals, großartig geschlagen. Und wir glauben, dass wir uns dem oberen Ende unserer Erwartungen näherten, über die wir beim letzten Anruf mit Ihnen gesprochen hatten. Die nächsten fünf Wochen wurden damit verbracht, zu reagieren und die Lieferkette wieder in vollem Umfang in Gang zu bringen und den starken Rückgang in China zu bewältigen, über den ich bereits gesprochen habe. Die Realität für den Rest der Welt ereignete sich im März, als die Vor-Ort-Bestellungen eingingen und die Arbeit von zu Hause aus begann. In diesen zwei, drei Wochen, zum Ende des Quartals, war ein starker Nachfragerückgang zu verzeichnen.

Wenn Sie jetzt in den April hinausgehen und sich das ansehen, begann Anfang April wie Ende März, aber in der zweiten Aprilhälfte haben wir einen allgemeinen Aufwärtstrend gesehen. Es bezieht sich nicht nur auf ein bestimmtes Geo oder ein bestimmtes Produkt. Wir denken, wenn wir es uns ansehen, ist ein Teil davon nur auf unsere neuen Produkte zurückzuführen, ein Teil davon ist auf die im April in Kraft getretenen Konjunkturprogramme zurückzuführen, und ein Teil davon ist wahrscheinlich das Verbraucherverhalten, wenn wir wissen, dass dies der Fall ist Ich werde noch eine Weile weitermachen und mir ein paar Geräte usw. zulegen, um mehr zu Hause zu arbeiten. Insbesondere, wie Luca meiner Meinung nach mitteilte, glauben wir, dass sich iPad und Mac in diesem Quartal im Jahresvergleich verbessern werden, und das sind Kunden, die entweder Online-Schulungen absolvieren oder remote arbeiten. Komplexe Antwort auf Ihre Frage, aber genau das sehen wir.

Shannon Cross

Thanks a lot. Das war hilfreich. Luca, es sei denn, ich habe es verpasst, Sie haben über verschiedene Puts und Takes im Quartal gesprochen, aber nicht wirklich über die Betriebskosten gesprochen. Ich weiß, dass Sie einige Kosteneinsparungen bei der COGS-Linie erwähnt haben. Ich bin gespannt, wie Sie über Ihre Ausgaben und OpEx denken, angesichts einiger der makroökonomischen Herausforderungen, mit denen Sie möglicherweise konfrontiert sind. Thanks a lot.

Luca Maestri

Yes. Also, Shannon, wie gesagt, wir leiten das Unternehmen langfristig, oder? Wir wissen also, dass der Kern des Geschäfts, der Kern des Unternehmens, die Innovation sowie die Entwicklung von Produkten und Dienstleistungen ist. Wir werden also weiterhin in unsere Pipeline investieren. Wir sind sehr gespannt auf das, was wir auf Lager haben. Und so werden wir dort weiter investieren. Natürlich sind wir uns der Umwelt bewusst und werden den VVG-Anteil des Unternehmens streng verwalten. Wir investieren neu in die neuen Dienstleistungen, die wir kürzlich eingeführt haben. Wie Sie wissen, haben wir die Basisbandaktivitäten von Intel gekauft. Und natürlich möchten wir diese Technologie entwickeln, weil wir sie für eine Kerntechnologie halten. Deshalb werden wir versuchen, die Notwendigkeit, unter schwierigen Umständen weiter zu investieren, und die Tatsache, dass wir das Geschäft mit Bedacht führen möchten, in Einklang zu bringen.

Tejas Gala

Danke, Shannon. Können wir bitte die nächste Frage haben?

Operator

Das wird von Wamsi Mohan von der Bank of America sein.

Wamsi Mohan

Yes. Thanks a lot. Tim, ich denke, ich spreche für alle, die anrufen, dass wir alle den Beitrag von Apple während dieser Pandemie sehr schätzen. Wir alle wissen das zu schätzen.

Tim cook

Thanks a lot for this.

Wamsi Mohan

Tim, in den vergangenen Abschwüngen haben wir nicht wirklich gesehen, dass Apple sich von Investitionen zurückgezogen hat. Und Sie als Unternehmen haben die Trittfrequenz der Produkteinführung weitgehend beibehalten. Angesichts dieser beispiellosen Zeiten und der mit der Produktentwicklung verbundenen Herausforderungen sind viele Herausforderungen verbunden, wenn Sie eine globale Präsenz für solche Aktivitäten haben und nicht in der Lage sind, viele Dinge persönlich zu erledigen. Wie sollten wir in den nächsten Quartalen über die Trittfrequenz der Produktentwicklung und Einführung denken? Und ein Follow-up haben.

Tim cook

Nun, wir arbeiten weiter. Wie Sie sehen, konnten wir zusammen mit allem anderen das iPhone SE, das iPad Pro mit der magischen Tastatur und das MacBook Air starten und ausliefern. Und so geht das Geschäft weiter und die neuen Produkte sind unser Lebenselixier. Und so arbeiten wir weiter. Alle gewöhnen sich an die Arbeit zu Hause. In some areas of the Company, people maybe even more productive in some other areas, they’re not as productive. And so, it’s mixed, depending upon what the roles are. But, as you can tell from what we did this quarter, despite the environment, we have our head down, are working because we know that our customers want the products that we’ve got. They’re even more important in these times.

Wamsi Mohan

Thank you, Tim. As a follow-up, I know you’re doing a lot with both the Apple Card and financing plan for iPhones to get your products in the hands of customers. But, I was wondering, would you consider using the strength of your balance sheet maybe a little differently, structure maybe deferred payments or things like that, or do you think that there could be other steps like bundling that you will consider versus what you already currently do? Thanks a lot.

Tim Cook

Well, as you know, we launched the payment plan earlier on Apple Card for iPhone. We’re working on doing that for other products as well. And you’ll see something on that shortly. So, we’re very-focused on the affordability point. The trade-in programs also are fairly wide across the board and act as both something great for the environment, also something great from a way to get that entry price down. In terms of deferred payments, nothing to announce today. But, as you know, having access to the card, at least in the United States, gives us more degrees of freedom. And that is not using our balance sheet. But, we play a key role in deciding what kind of programs go with the card.

Tejas Gala

Thanks, Wamsi. Can we have the next question, please?

Operator

That will come from Morgan Stanley’s Katy Huberty.

Katy Huberty

Thank you for the question. I hope the whole team is staying healthy and safe. Tim, I want to start on a longer term question. Where do you see structural changes on the back of this health crisis that might present opportunities for new revenue streams at Apple? And I’m particularly thinking about your past comments on health and augmented reality. But I’m sure there is even more areas of inspiration and creativity coming out of the company. And then, I have a follow-up.

Tim Cook

I think, there are things from just a great reminder of how important our products are for remote work. And it’s pretty clear to me that where things will get a lot closer to normal than they are today, obviously. I think many people are finding that they can learn remotely. And so, I suspect that trend will accelerate some. I think that’s probably also true about working remotely in some areas and in some jobs. And so, I think we have significant solutions and products for all of those groups. On the health area, I gave some examples in my opening comments about the ECG being used on the Watch. You can bet that we’re looking at other areas in this. We were already doing that because we viewed that that area was a huge opportunity for the Company and a way for us to help a lot of people. And so, you will see us continue on that. I wouldn’t say that the health door opened wider. I would say, it was already opened fairly wide.

Katy Huberty

OK. And then, as a follow-up, the $50 billion share repurchase authorization is impressive in absolute terms, but it is a bit lower than the last couple of years. So, just any context around the thought process of landing on $50 billion. And then, related to that, you have one of the strongest balance sheets in the world. Does the current environment change your thinking at all around M&A opportunities?

Luca Maestri

Let me answer that, Katy. First of all, on the buyback. As I said, in general, our approach to capital allocation has remained the same for the last several years and it’s not changing now. Keep in mind here, we’re talking about just the authorization, right? And when you look at our actual results at the end of every quarter, you see how much we actually do in terms of share repurchases. The $50 billion is in addition to over $40 billion that is still remaining from the past authorization that we’ve received from our Board, right? So it’s the total available or outstanding in terms of authorization is over $90. And as you look at our run rate during the last several years, you know that that is a very adequate amount. And as you know, we will provide an additional update a year from now. So, nothing really has changed there. And nothing has changed on our approach for M&A. We’ve been quite active over the last several years. We purchase companies on a very regular basis. We’re always looking for ways to accelerate our product roadmaps or fill gaps in our portfolio, both on the hardware side, on the software side, on the services side. So, we will continue to do that. And so, also on the M&A front, nothing has changed.

Tejas Gala

Thanks, Katy. Can we have the next question, please?

Operator

That will come from Amit Daryanani with Evercore.

Amit Daryanani

Thanks for taking my question. I have two as well. I guess, first off on the channel inventory. I was hoping if you could talk about how did channel inventory look like in the March quarter, because it sounds like it may be below the historical ranges. And then, the discussion you had for June quarter performance of iPhones, what are you embedding from a channel building back inventory levels in that expectation.

Tim Cook

Amit, it’s Tim. If you look at the iPhone channel inventory during Q2, the reduction of it was more than the reduction from the previous year. It’s not unusual that we reduce in Q2. In fact, if you look back, generally speaking, in the first half of the calendar year, we reduce channel inventories; during the second half of the calendar year, we generally raise channel inventories. That’s a seasonal thing. And sitting here today, I believe that will happen this year as well. So, hopefully, that answers your question. And by the way, we ended in a comfortable position. You could conclude from that that we were within a target range.

Amit Daryanani

That’s really helpful. Maybe just for follow-up. Tim, I was hoping you could maybe talk a little bit about, how do you think about Apple’s manufacturing strategy and perhaps need for some diversity, especially given everything in the Company and everyone has gone through over the last 12 months, how do you think about that? And do you feel comfortable that the supply chain and the manufacturing base is well situated today to launch the traditional fall products that they used to get from Apple?

Tim Cook

As you know, our supply chain is global. And so, our products are truly made everywhere. And I would focus on that versus focus on one element of the manufacturing process, which tends to get more visibility, which is the final assembly. We have some final assembly in the United States; we have final assembly in China as well. I think, you’d have to conclude, or at least I conclude that if you look at the shock to the supply chain that took place this quarter, for it to come back up so quickly really demonstrates that it’s durable and resilient. And so, I feel good about where we are. That said, we’re always looking at tweaks. And it’s just not something we talk about, because if we view it as confidential and competitive information. And so, we will look at the — as we get out of this totally, we will look to see what we learned and what we should change.

Tejas Gala

Thank you, Amit. Can we have the next question, please?

Operator

We’ll hear from Jeriel Ong with Deutsche Bank

Jeriel Ong

Hi, guys. Thanks for letting me ask a couple of questions. So, I want to focus my question on Services. The segment was solid in the quarter despite overall macro weakness. I can kind of see the logic behind it being strong despite product weakness overall. As you kind of look at the rest of the year, do you think that sustains or at some point does the macro impacts worldwide impact the Services line?

Luca Maestri

Jeriel, let me take that one. We typically don’t give a lot of specifics about our categories. But I’ve said, as we look into the June quarter, we see two distinct trends in our services business overall. Our ecosystem is very strong. Our customers are very engaged. We are continuing to grow double digits, the number of transacting accounts and paid accounts. And so, we expect our digital services to continue at the same level of performance that we have seen during the March quarter. And that includes the App Store, of course, our video business, our music business, cloud services. So, we expect all these businesses to continue to grow very strongly.

Given the overall economic environment, the level of demand right now, there are two businesses that we believe are going to be impacted during the June quarter. One of them is AppleCare. AppleCare is essentially comprised of our product repair business and the warranty agreements that we signed with our customers when they purchase our devices. Both these businesses have been affected obviously by the store closures. And not only our retail stores, but also our partners points of sale, and obviously, the reduced level of customer traffic because of the social distancing measures. Law? And we do expect AppleCare to be affected during the during the June quarter.

The other business, which we think is going to be impacted by the overall economic weakness and the uncertainty on when businesses will reopen is advertising, which is the sum of our advertising business on the App Store, on Apple News, and the third party agreements that we have on the advertising front. So, these are two things that during the June quarter will create a headwind for the Services business.

Jeriel Ong

I have it. I appreciate that. My second question is about the overall purchasing decisions the consumers are making. So far, through April, have you seen increased perhaps downtick across your product line? So for example, somebody might have shift maybe toward the lower end of the storage mix of certain products. And do you expect that going forward, as unemployment uptick and macro impacts kind of layer on through the rest of ‘20? Thanks a lot.

Tim Cook

I haven’t seen what you’re asking. No. I have seen a strong customer response to iPhone SE, which is our most affordable iPhone. But it appears that those customers are primarily coming from wanting a smaller form factor with the latest technology, or coming over from it from Android. So, those are the two principal kind of segments versus somebody buying down, as you’re talking about it. We’ve also seen — we launched the iPad Pro in the midst of all of this and the reception there has also been incredibly good. And that’s obviously our top of the line iPad. And so, I’m not seeing what you’re alluding to, at least at this point.

Tejas Gala

Thanks, Jeriel. Can we have the next question, please.

Operator

That will be from JP Morgan’s Samik Chatterjee.

Samik Chatterjee

Hallo. Thanks for taking my question. If I can just start with a question on kind of what you’re seeing in China. You mentioned going to the pickup in activity. But, is that driven by more kind of footfall in the stores, or what’ve you seen relative to online activity, and how much of this recovery is being driven online? Any thoughts on that, please?

Tim Cook

Yes. What we saw in China for the full quarter — and I’ll speak about mainland China because I think that’s the source of your question. We saw strong results in iPad and in Wearables, and in Services. And if you look up underneath the full quarter, we saw a strong January, and then a significantly reduced demand in February as the shelter-in-place orders and the lockdowns went into effect in China and the stores closed. And then, in March, as stores reopened, the recovery began. And then, we’ve seen further recovery in April. Where that goes, we will see. But that’s kind of what we’ve seen so far there.

To your question about store traffic, store traffic is obviously up from where it was in February, but it is not back to where it was pre the lockdown. There has been, however, more move to online. And as I mentioned earlier in my remarks, it’s pretty phenomenal actually. Retail had a quarterly record for us during the quarter. And that’s despite stores being closed for the three-week period around the world. And ex China — and then China was closed prior to that three weeks. And that’s partly because the online store had such a phenomenal quarter, and that included in China, but it was also other regions as well. So, there is definitely a move. And whether that’s a permanent shift, I would hesitate to go that far, because I think people like to be out and about. They just know that now is not the time to do that.

Samik Chatterjee

If I can just follow up on your previous comment about the strong demand you’re seeing for iPhone SE. Just given the price point, I’m wondering if you are expecting any change in terms of the geographic mix of where the demand comes from relative to typically what do you see for other iPhones from the line up on, just giving the lower price point?

Tim Cook

I think, it plays in every geo, but I would expect to see it doing even better in areas where the median incomes are less. And so, we’ll see how that plays out. And I expect some fair number of people switching over to iOS. So, it’s an unbelievable offer. It’s, if you will, the engine of our top phones in a very affordable package. And I think — and it’s faster than the fastest Android phones. And so, it’s an exceptional value.

Tejas Gala

Thanks a lot. Can we have the next question, please?

Operator

Certainly. Our last question today will be from Chris Caso with Raymond James.

Chris Caso

Yes. Thanks a lot. I wanted to follow up with another question on iPhone SE and the decision to bring it back and where it sits within the total iPhone strategy. And I guess, coupled with the fact that iPhone 11, you made the decision to bring that at a lower price point. What does that tell us with respect to your approach to iPhone pricing and flexibility? Is this helping to add users and kind of bring people into the ecosystem? And if so, what does that imply for gross margins?

Tim Cook

Chris, we’ve always been about delivering the best product at a good price. And that fundamental strategy has not changed at all. As you know, we did have an SE for a while. It’s great to bring it back. It was a beloved product. And so, I wouldn’t read anything into that other than we want to give people the best deal that we can while making the best product.

Chris Caso

OK. As a follow-up — the follow-up question is on commodity pricing. And I think, you had expected to see some commodity price declines through the March quarter. If you could talk about what you expect, as you go through the year, perhaps in this new environment, and again, whether that turns into a challenge or a headwind for gross margins as you go into the second half?

Tim Cook

Yes. For March, Chris, we saw NAND pricing increase slightly while DRAM and displays and the other commodities declined. For the June quarter, we would expect NAND and DRAM pricing to remain at this historically low level, while displays and most other commodity prices we expect to decline.

Tejas Gala

Thank you, Chris. A replay of today’s call will be available for two weeks on Apple Podcasts as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 8888-203-1112 or 719-457-0820. Please enter a confirmation code 3229513. These replays will be available by approximately 5 pm Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us.

Operator

And that does conclude today’s conference. Thank you all for joining us today.




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