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An Overview of Apple's CEO Commentary and Key Q&A Responses from yesterday's Financial Conference Call

1 cover tim cook  conference call commentary(Click on image to Enlarge)

Yesterday afternoon Patently Apple posted a report titled "Apple posted quarterly revenue of $117.2 billion, down 5% Year-over-Year due to iPhone shipments hindered by COVID lockdowns in China." In today's report, we cover key conference call points made by Apple's CEO, Tim Cook, along with the Q&A segment of the call, primarily covering Questions aimed for Tim Cook and his responses. Quarterly financial conference calls always provide both investors and fans with more color for each quarter, beyond headline news and rumor cycles.    

Apple's CEO Tim Cook: Key Conference Call Points

Good afternoon, everyone, and thanks for joining us. Today, we're reporting revenue of $117.2 billion for the December quarter. We set all-time revenue records in a number of markets, including Canada, Indonesia, Mexico, Spain, Turkey, and Vietnam, along with quarterly records in Brazil and India.

As a result of a challenging environment, our revenue was down 5% year over year. But I'm proud of the way we have navigated circumstances, seen and unforeseen, over the past several years, and I remain incredibly confident in our team and our mission and in the work we do every day. Let me discuss the three factors that impacted our revenue performance during the quarter. The first was foreign exchange headwinds, which had a nearly 800 basis point impact.

On a constant currency basis, we grew year over year and would have grown in the vast majority of the markets we track. The second factor, which we described in a November 6th update with COVID-19-related challenges, which significantly impacted the supply of iPhone 14 Pro and iPhone 14 Pro Max and lasted through most of December. Because of these constraints, we had significantly less iPhone 14 Pro and iPhone 14 Pro Max supply than we planned, causing ship times to extend far beyond what we had anticipated.

Production is now back where we want it to be. The third factor was a challenging macroeconomic environment as the world continues to face unprecedented circumstances from inflation, to war in Eastern Europe, to the enduring impacts of the pandemic. And we know that Apple is not immune to it. But whatever conditions we face, our approach is always the same.

Revenue came in at $65.8 billion for the quarter, down 8% year over year. However, on a constant currency basis, iPhone revenue was roughly flat. Our customers continue to rave about the astounding camera capabilities and unprecedented battery life and the groundbreaking suite of health and safety features. The iPhone 14 lineup pushes the limits of what users can do with a smartphone.

During the quarter, Mac revenue came in at $7.7 billion, which was in line with what we had expected. We had a difficult compare because this time last year, we had the extremely successful launch of the redesigned M1 MacBook Pros. We also faced a challenging macroeconomic environment and foreign exchange headwinds. We remain confident in and focused on the long-term opportunity for Mac.

During the quarter, iPad revenue grew 30% to a total of $9.4 billion. The very strong growth was due in part to a favorable compare to the December quarter a year ago when we experienced significant supply constraints.

Revenue for Wearables, Home and Accessories was $13.5 billion, which was down 8% year over year driven by foreign exchange headwinds and a challenging macroeconomic environment. We remain excited about the long-term opportunity in the category.

We continue to hear wide praise for Apple Watch Series 8 and Apple Watch Ultra, which has set a new standard for what's possible with the wearable. From a whole host of health and safety features to incredible new capabilities for extreme athletes, there is something for everyone in these amazing products. Customers are excited about some phenomenal new features we've made available across many of our products as well. One of the highlights is emergency SOS via satellite, which launched for iPhone 14 customers in the U.S. and Canada in November and for customers in France, Germany, Ireland, and the U.K. in December. This is a feature we hope our users will never need, but it is incredibly heartening to get emails from people describing the life-saving impact our new safety features have had on them. We're always looking for new ways to empower people to create and collaborate.

Today, we are very excited to announce that we've achieved a truly incredible milestone. Thanks to our deep commitment to innovation, incredible customer loyalty and satisfaction, and a large number of switchers, we now have more than 2 billion active devices as part of our growing installed base, double what it was just seven years ago.

This is an incredible testament to our products and services and the strength of our ecosystem. We set an all-time revenue record of $20.8 billion in services, which was better than what we had expected.

We achieved double-digit revenue growth from App Store subscriptions and set all-time revenue records across a number of categories, including cloud and payment services. All told, Apple now has more than 935 million paid subscriptions.

Q&A Segment: Key Questions and Answers

Q: David Vogt -- UBS – Analyst: You talked about the supply chain returning back to normal after a very difficult October, November, but we're still seeing some disruptions across tech products, whether it's enterprise or consumer-facing. How do you think about your supply chain and maybe the levels of inventory or builds that you might need as we go forward to sort of insulate your business from these sort of episodic disruptions? Have you changed your view? And if so, how does that affect ultimately margins and sort of your balance sheet and cash flow items going forward?

A: Tim Cook -- Chief Executive Officer: From a supply point of view, we did see disruption from early November through most of December. And from a supply chain point of view, we're now at a point where production is what we need it to be. And so the problem is behind us.

In terms of going forward in the supply chain, we build our products everywhere. There are component parts coming from many different countries in the world, and the final assembly coming from three countries in the world on just iPhone. And so we continue to optimize it. We'll continue to optimize it over time and change it to continue to improve.

I think when you sort of zoom out and back up from it, the last three years have been a pretty difficult time between COVID and silicon shortages and the like. And I think it's -- I think we have had a very resilient supply chain in the aggregate. In terms of supply for this quarter, which I think was one of your points, I think we're in decent supply on most products for the quarter currently.

Q: Shannon Cross, Credit Suisse Analyst: Can you talk a bit about China? What you're seeing -- obviously, you've had the issues with production, but I mean more on the demand side. As we've gotten through Chinese or in Chinese New Year and the opening, I'm just wondering, are you seeing the Chinese consumer come back? What are they buying? And how are you thinking about your position there?

A: Tim Cook: Shannon, last quarter, we declined by 7% on a reported basis, but we actually grew on a constant currency basis. And that was despite some significant supply constraints. Obviously, the sort of COVID restrictions throughout China that happened in various different places throughout the country also impacted the demand during the quarter. When you look at the opening that started happening in December, we saw a marked change in traffic in our stores as compared to November.

Q: Erik Woodring, Morgan Stanley Analyst: That 2 billion installed base -- device installed base figure, that's up, I believe, 200 million units year over year. That implies the strongest annual gain in new devices in your installed base basically as far back as you've provided those data points.

And so I guess my two questions are: one, can you provide the installed base for the iPhone at year-end? And then two, is there anything that you see in this new cohort of users that might look different or similar to past cohorts, either by demographic or regions or monetization ramp?

A: Tim Cook: Yes. The installed base is now over 2 billion active devices, as you mentioned. And we set records across each geographic segment and major product category. And so it was a broad-based change.

Two, I'll correct one thing that you said, it's up over 150 million year over year. The last report we reported to be over 1.85. And so it's 150 million, which we're very proud of. We also saw strong double-digit in several of the emerging markets, which is very important to us. For example, India and Brazil as just two examples. So very, very strong. And obviously, it bodes well for the future.

Q: Aaron Rakers, Wells Fargo Securities Analyst:  I'm curious, Tim, how you think about the role of AI in your strategy as far as particularly in the services segment, whether you're not -- you see opportunities to excel monetization abilities within the paid subscriber base and whether or not AI, is it something that you're implementing a bit more strategically there?

A: Tim Cook:  It is a major focus of ours. It's incredible in terms of how it can enrich customers' lives. And you can look no further than some of the things that we announced in the fall with crash detection and fall detection or back a ways with ECG.

I mean these things have literally save people's lives. And so we see an enormous potential in this space to affect virtually everything we do. It's obviously a horizontal technology, not a vertical. And so it will affect every product in every service that we have.

Q: Amit Daryanani, Evercore ISI Analyst: If I think about services as you go forward. I know you had really good growth in services, I think, over the last several years. But as you go forward in services, what do you think drives the growth more? So is it the expansion of your installed base? Or is it more going to be driven by "Average revenue per user" (ARPU) going higher for you? I'm just curious, how do you think about those two buckets as you go forward?

A: Luca Maestri, Apple CFO: Amit, there's a number of things, and I've mentioned a few of them during the call. The first step is always the installed base. It's the engine for services growth. And the fact that the installed base is growing very nicely, and it's growing in a lot of emerging markets, it's growing even faster, that gives us a larger addressable pool of customers.

So that's incredibly important. The second one is that we are seeing that the level of engagement of our customers already in our ecosystem continues to grow. We -- I mentioned that both transacting accounts and paid accounts grew double digits. And so that bodes very well for the future.

And we have a lot of transacting accounts that kind of moved to paid accounts over time. The other aspect that is very important for us is to continue constantly to improve the reach and the quality of our services. And I give the example of Apple Pay, which it's a great example because we started off primarily in the United States. Now we've taken it to 70 markets, millions of merchants.

And so obviously, payment services are -- continue to set new highs all the time for us. And as we've seen over the last few years, we also launched new services over time, and that obviously contributes to the growth. We're very excited. And when we look at the behavior of our installed base, we think it's very promising for the continued growth of our Services business.

Q: Harsh Kumar, Piper Sandler, Analyst: Tim, I had a quick question on emerging markets. Seems like you're making a lot of strides in India. I want to understand the kind of share you have in China and India. And relative to that, what would be your aspirational but sort of achievable share in iPhones in those territories, whether it's units or revenues? And I was hoping to draw on your experience and maybe what you've seen in other countries where you've had some longer presence.

A: Tim Cook: And looking at the business in India, we set a quarterly revenue record and grew very strong double digits year over year. And so we feel very good about how we performed, and that was -- that's despite the headwinds that we've talked about. Taking a step back, India is hugely exciting market for us and is a major focus. We brought the online store there in 2020. We will soon bring Apple retail there. So we're putting a lot of emphasis on the market. There's been a lot done from a financing options and trade-ins to make products more affordable and give people more options to buy. And so there's a lot going on there.

We are, in essence, taking what we learned in China years ago and how we scale to China and bringing that to bear. And I don't have the exact market shares in front of me, but I think you would see that from a market share point of view that we grew around the world last quarter despite -- on iPhone despite the challenges that we've had on the supply side. And I wouldn't expect to have a difference in those two markets.

Q: Wamsi Mohan, Bank of America Merrill Lynch, Analyst: Tim, you've done a phenomenal job of driving consumer choice toward higher-end products within your portfolio. How would you compare this cycle for iPhones if you were to segment the Pro versus non-Pro models versus the cycles from the past few years? And do you think this move to higher ASPs is sustainable? Or do you think it reverses in a tighter consumer spending environment?

A: Tim Cook: The Pro has been a -- 14 Pro and the 14 Pro Max have done extremely well up until the point where we had a supply shortage and couldn't provide them -- couldn't provide the total of the demand. And so it's definitely a strong Pro cycle. I think there's a number of reasons for that, but the most important one is always the product. And I think the innovations and the product speak for themselves.

And we feel very good about the product that we announced back in September and are happy to now be at a point where we're shipping to the demand.

Q: Krish Sankar, Cowen and Company, Analyst: The PC industry is expecting a decline in PC shipments this year also. How do you think about the Mac relative to kind of like where the PC industry as a whole is expecting the shipments to end up? Is there any color you can give on that?

A: Tim Cook: The industry is very challenged, as you say. It's -- the industry is contracting. I think from us, though, is -- and I don't know how this year will play out, so I don't want to predict the year. But over the long run, we have a market that is a reasonable sized market, a big market. And we have low share, and we have a competitive advantage with Apple silicon. And so strategically, I think we're well-positioned in the market, albeit I think it will be a little rough in the short term.

10.0X3  Quarterly Financial News


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