Today's report covers the opening commentary from Apple's CEO Tim Cook during their Q2 2016 Financial Conference Call that was held on April 26, 2016. It's a transcript that Patently Apple has created so that we can be more accurately when quoting Tim Cook in future reports about specifics. It's an account that any Apple fan could rely on for facts about Apple's Q2 – and we hope that you enjoy it. Later this week we may cover some of the key points made during the conference's Q&A session with a focus on China. Cook's opening statement didn't reflect any real problems with China and in fact stated that Apple Pay launch this quarter in China had gone great. Despite having fallen short from sales expectations from a comparison to a monster quarter last year and the fact that none of Apple's iPhone SE sales made it into the quarter, Apple had a fairly strong quarter.
Tim Cook's Opening Q2 2016 Financial Conference Commentary
Tim Cook stated during Apple's conference call that "despite the pause in our growth our results reflect excellent execution by our team in the face of ongoing macroeconomic headwinds in much of the world and difficult year over year comparisons.
We saw continued currency weakness in the vast majority of our international markets. In constant currency, our revenue declined by 9% from last year, 400 basis points less than the reported decline of 13%. For the first half of the fiscal year our revenue in constant currency up 1% year over year.
Despite challenges there were a number of encouraging signs during the quarter. Our installed base of over 1 billion active devices continues to grow strongly. We added a huge number of Android switchers and new to Mac customers and we generated very strong growth from services.
We sold 51.2 million iPhones in the quarter consistant with the range of our own expectations but lower than the exceptional year ago quarter when we saw acceleration in iPhone upgrades and 40% iPhone sales growth over the previous year.
To provide some additional color, iPhone sales come from three sources: Customers who upgrade from previous iPhone models; customers who switch from Android and other operating systems; and customers who purchase a smartphone for the first time.
As we look at each of these three sources of iPhone sales, we see a business that is healthy and strong.
First: from an upgrade perspective, during the first half of this year the upgrade rate for the iPhone 6s cycle has been slightly higher than what we experienced in the iPhone 5S cycle two years ago but it is lower than the accelerated upgrade rate we saw with iPhone 6 which is as you know is a big contributor to our phenomenal revenue growth a year ago.
Most importantly, our customers are incredibly loyal. A recent Kantar survey of U.S. smartphone purchasers indicated a 95% iPhone loyalty rate, the highest ever measured for any smartphone.
Second: We continue to see a very high level of customer switching to iPhone from Android and other operating systems. In fact, we added more switchers from Android and other platforms in the first half of this year than any other six-month period ever.
Third: With only 42% smartphone penetration of the global handset market today, iPhone is still attracting millions of first time smartphone buyers each quarter especially from emerging markets. For example: In India, our iPhone sales were up 56% from a year ago."
"Next I'd like to talk to you about services," Cook noted, "which was our second largest revenue generating category during the quarter. Setting aside the amount we received from a patent settlement in the December quarter, the March quarter services revenue was our highest ever.
Services revenue jumped 20% to six billion dollars. App Store revenue was up 35% to beat last quarter's all-time record and Apple Music continues to grow in popularity with over 13 million paying subscribers today.
We feel really great about the early success of Apple's first subscription business and our Music revenue has now hit an inflection point after many quarters of decline.
The services business is powered by our huge installed base of active devices which crossed one billion units earlier this year. As we discussed on this call in January, those one billion plus active devices are a source of recurring revenue that is growing independent of the units shipments we report every three months. In fact, the purchase value of services tied to our installed base was a record $9.9 billion dollars in the March quarter up 27% over last year accelerating from the 24% growth rate we reported in the December quarter."
"The reach of Apple Pay also continues to expand following a very successful launch in China in the March Quarter and last week's roll out in Singapore. Apple Pay is growing at a tremendous rate with more than five times the transaction volume of a year ago and one million new users per week.
There are more than ten million contactless ready locations in the countries where Apple Pay has launched to date including more than two and half million locations now accepting Apple Pay in the United States and more expansion of Apple Pay is coming soon."
Turning to the Mac, Cook noted that "We met our expectation in addition to reducing channel inventory by about 100,000 units. Overall the Mac continues to attract a large percentage of new customers and our latest survey in major markets over half of buyers were new to the Mac and in some countries, the percentage is extremely high like in China where over 80% of customers were purchasing a Mac for the first time.
We are confident in our Mac business and our ability to continue to innovate and gain share in that area."
Turning to the Apple Watch, Cook noted that "unit sales met our expectations in the quarter. For some color as on how we think about Apple Watch sales, we expected seasonality to be similar to the historical seasonality of iPod which typically generated 40% of more of its annual sell through in the December quarter.
We started shipping Apple Watch just one year ago and has quickly become the bestselling and most loved smartwatch in the world. In fact, unit sales of Apple Watch during its first year exceeded sales of iPhone in its first year.
Last month, we refreshed the lineup for the spring with new bands and a new starting price point and the response from customers has been great. Apple Watch is an increasingly central part of user's lives from responding to messages to managing calendars and navigation with maps, to helping them be more fit and some cases the heart rate sensor has even helped save lives. We're really excited about the first year with Apple Watch; we learned a lot; and believe it has an exciting future ahead.
On the iPhone SE
We announced some fantastic new products during the March quarter. iPhone SE came available on March 31st so none of its sales were reflected in our second quarter results, but so far this quarter we're seeing terrific customer response. iPhone SE is the most 4" phone ever and it's a great option for customers all over the world who want a compact phone with advanced features at a great price without compromising performance.
Demand has been very strong and exceeds supply at this point but we're working hard to get the iPhone SE into the hands of every customer who wants one as quickly as possible. The addition of the iPhone SE in the iPhone lineup places us in a better strategic positon to attract even more customers into our ecosystem.
On the 9.7" iPad Pro
We also unveiled a stunning 9.7" iPad Pro with cutting edge performance and our most advanced display yet. The reviews of our new iPad Pro have been great and we're hearing from customers that the features and capabilities in the new Pros make them both the ultimate upgrade for iPad owners and a great PC replacement.
In the June quarter, we expect to see our best iPad revenue compare in over two years. iPad is the bestselling, best reviewed and most used tablet on the market. Customers tell us that they love the iPad for its unique mix of portability, capability and versatility with over a million iPad apps in the App Store to help them work, play, learn and create.
About Health Apps
We also announced CareKit, a new software framework that developers can use to help people take a more active role in their health by keeping track of their care plan, monitoring their symptoms and medications and delivering the insights they need to make smart decisions about their health.
We're very excited about the ways iPhone and Apple Watch are helping people live healthier lives. We believe there's great promise here for the future and we are very interested to see where this takes us.
Contribution to Society
As always, we're contributing to society beyond our products promoting the use of renewable energy across our facilities and inside our supply chain and developing cutting edge technologies to revolutionize recycling in the materials that we use. We are unwavering in our commitment to protect the security and privacy of our customers and their data and we're actively promoting inclusion and equality across our business.
As we continue through the June quarter, I'd like to remind you that we measure the health of customer demand based on sell-through. Despite ending Q2 within our channel inventory targets in light of the macroeconomic environment we plan to lower our channel inventories in the June quarter. This will impact our reported revenue in Q3. Luca will provide more details on this in his commentary.
Apple's Future is Bright
But before I turn over the call to him, I'll summarize by saying that the future of Apple is very bright. Our product pipeline has amazing innovations in store. We're very excited about bringing together developers for our four major platforms at our World Wide Developer Conference in June. We're forging ahead with important investments in Research and Development, in our infrastructure and in our supply chain. We've made 15 acquisitions in the last four quarters to accelerate our product and services roadmaps and we're always on the lookout for companies with great technology, talent and strategic fit.
Creating value for shareholders by developing great products and services that enrich people's lives will always be our top priority and the key factor driving our investment and capital allocation decisions.
As our business continues to generate high levels of free cash flow we're in the fortunate position to expand our capital return program again this year as we've done in each year since we started the program four years ago. Today we're announcing an extension of the time frame of the program by four quarters through March 2018 and we're expanding the total program size from $200 billion to $250 billion. Luca has more details on this announcement and our results for the March quarter.
This concludes Tim Cook's opening remarks for Apple's Q2 2016 conference call. We may review the call further in a future report covering any important matters that may have surfaced during the Q&A session that followed, especially commentary about China – so stay tuned for that.