Apple Inc.

Thank you, Tim. Good afternoon, everyone. It has been a very different quarter than we were expecting when we last talked to you at the end of January. but we could not be more proud of our Apple teams around the world, our role in supporting local communities and our partners throughout the value chain, and how resilient our business and financial performance has been during these challenging times. So the revenue for the quarter was 58.3 billion, up 1% from a year ago, despite the extreme circumstances from the impact of COVID-19 and a headwind of 100 basis points from foreign exchange. Products revenue was 45 billion, down 3%. After a very strong January, our performance was impacted, particularly during the last three weeks of the quarter, when lockdowns and point-of-sale closures increased due to COVID-19 spreading around the world and affected our product sales. However, on a demand basis, our performance was stronger than our reported results, as we reduced iPhone channel inventory more than we did a year ago. Importantly, our installed base of active devices reached an all-time high in all of our geographic segments and all major product categories. Services revenue followed a different trend with very strong year-over-year growth of 17%. We set a new all-time revenue record of $13.3 billion with all-time records in many of our services categories and in most countries we track. I'll provide more details on this later. Company gross margin was 38.4%, flat sequentially with cost savings and mixed shift towards services offset by the seasonal loss of leverage. Products gross margin was 30.3%, decreasing 380 basis points sequentially due to loss of leverage and unfavorable mix. This drop was more pronounced than under normal circumstances due to the COVID-19 impact I mentioned earlier. Services gross margin was 65.4% up 100 basis points sequentially driven by favorable mix. Our reported tax rate for the quarter was 14.4%. This was lower than our 16.5% guidance due to one time discrete items. Net income was 11.2 billion and earnings per share were $2.55 up 4%. Operating cash flow was very strong at $13.3 billion, an improvement of $2.2 billion over a year ago. Let me get into more detail for each of our revenue categories. iPhone revenue of $29 billion declined 7% year over year, as both iPhone supply and demand were affected by the impact of COVID-19 at some point during the quarter. On the supply side, we suffered from some temporary supply shortages during February. but we've been extremely pleased with the resilience and adaptability of our global supply chain as well as its ability to get people back to work safely when circumstances allow. Our operations team and manufacturing partners put forth an extraordinary effort to restore production quickly and we exited the quarter in a good supply 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 affect demand in China for the next five weeks and then more broadly around the world for the last three weeks of the quarter, while lockdowns and point of safe closures became more widespread in many countries. While we did see a slight elongation in our replacement cycle towards the end of the quarter, which we attribute to the widespread point of sale closures, our active install base of iPhones has reached an all-time high. This speaks to the quality of our products and strength of our ecosystem. In fact, in the US, the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 99% for iPhone 11, 11 Pro, and 11 Pro Max combined. Turning to services, we set an all-time revenue record of $13.3 billion. We have strong performance across the board with all-time revenue records in the App Store, Apple Music, Video, Cloud Services, and our App Store search ad business. And we also set a March quarter record for AppleCare. Our new services, Apple TV+, Apple Arcade, Apple News+, and Apple Card, continue to add users, content, and features while contributing to overall services growth. As Tim mentioned, we are well on our way to accomplishing our goal of doubling our fiscal 16 services revenue during 2020. App Store revenue grew by strong double digits thanks to robust customer demand for both in-app purchases and subscriptions. Our third party subscription business grew across multiple categories and increased over 30% year over year. reaching a new all-time high. Our first-party subscription services also continue to perform very well. Apple Music and Cloud Services both set all-time revenue records, and Apple Care set a March quarter record. Paid subscriptions for all three of these services were up strong double digits. Customer engagement in our ecosystem continues to grow strongly, and the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the March quarter. In particular, the number of paid accounts increased double digits in all of our geographic segments. We now have over 515 million paid subscriptions across the services on our platform, up 125 million from a year ago. On a sequential basis, paid subscriptions grew by over 35 million. This is the highest sequential growth we have ever experienced. With this momentum, we're confident we will reach our increased target of 600 million paid subscriptions before the end of calendar 2020. Wearables, home, and accessories establish a new March quarter record with revenue of 6.3 billion, up 23% year over year, with strong double-digit performance across all five geographic segments. Our wearables business is now the size of a Fortune 140 company, and we're very excited by the many opportunities in front of us for this product category. For example, Apple Watch continues to extend its reach at over 75%. of the customers purchasing Apple Watch around the world during the quarter were new to the product. Next, I'd like to talk about Mac and iPad. Mac revenue was 5.4 billion. iPad revenue was 4.4 billion. Towards the end of the quarter, we launched a brand new iPad Pro that includes a first-in-class LiDAR scanner with some really exciting augmented reality applications. A MacBook Air with significantly improved performance at a lower price. We're very pleased with the strong customer interest for both products. Importantly, around half of the customers purchasing Macs and iPads around the world during the quarter were new to that product, and the active install base for both Mac and iPad reached a new all-time high. And the most recent surveys of consumers from 451 Research measured customer satisfaction at 95% for iPad and 96% for Mac. In the enterprise market, businesses everywhere have been making the transition to working remotely. We've created content to assist our customers in this transition, including an on-demand video learning series focused on topics like remote deployments of iPads and Macs and security. We've also realigned our own retail business and enterprise teams to provide timely and relevant support to customers as they navigate new work environments. Some of our largest customers offering Mac to employees, such as IBM and SAP, have been able to pivot quickly to allow employees to easily set up and secure their devices from home, benefiting from Apple Business Manager and zero-touch deployment. And we've seen countless examples of new projects and remote deployments implemented in just a few hours. Peloton, for instance, worked with our New York teams to deploy an entire fleet of Macs overnight so their team could work remotely. In essential sectors, such as grocery and financial services, we've seen organizations adopt our technology to better serve their customers safely. Leading grocers around the world like Trader Joe's, Woolworth's, Lawson's, Sainsbury's, Lidl, and Carrefour offer Apple Pay so customers can use contactless payments. And as stores shift to become fulfillment centers for online orders, organizations are leveraging apps for remote shoppers and food delivery to reduce food traffic. In banking, where safety and security is a top priority, One way to protect company and client information is by providing corporate iOS devices to employees who use mobile phones daily as part of their jobs. As an example, Bank of America is purchasing tens of thousands of additional iOS devices for their workforce. Let me now turn to our cash position. First, I want to note that liquidity has not been an issue for us during these highly unusual financial market conditions. We have an extraordinarily strong balance sheet, very deep access to capital markets, and unmatched free cash flow generation. We ended the quarter with 193 billion in cash plus marketable securities, total debt of 110 billion. And as a result, net cash was 83 billion at the end of the quarter. We returned 22 billion to shareholders during the March quarter, including 18.5 billion through open market repurchases of 64.7 million Apple shares and 3.4 billion in dividends and equivalents. Finally, as we move ahead into the June quarter, I'd like to provide some color on what we are seeing, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. As Tim mentioned, given the lack of visibility and certainty in the near term, we will not be issuing guidance for the coming quarter. However, based on what we have seen in April and how we think things might play out, I would like to provide some additional insight on headwinds and tailwinds we're facing. From a foreign exchange standpoint, the US dollar has appreciated recently against most currencies around the world, And as a result, we expect our revenue to be negatively impacted by more than $1.5 billion on a year over year basis. Our global supply chain is back up and running. We are in a typical supply position, including our usual ramp associated with new products recently launched. These newly launched products, iPad Pro, MacBook Air, and iPhone SE have all received outstanding customer response, even during these extreme circumstances. On iPhone and wearables, we expect the year-over-year revenue performance to worsen in the June quarter, relative to the March quarter. On iPad and Mac, we expect the year-over-year revenue performance to improve in the June quarter. On services, we are seeing two distinct trends. First, customers are actively engaging with our ecosystem and digital services, and we believe the very strong recent performance in the app store, video, music, and cloud services will continue throughout the June quarter. Second, Due to the overall reduced level of economic activity due to the lockdowns around the world, services like Apple Care and advertising have been impacted. Apple Care is comprised of our product repair business and the warranty agreements with our customers, both of which have been obviously affected by store closures and reduced level of customer traffic. Advertising, which is comprised of third-party agreements, our app store search ads, and Apple News ads, has been impacted by overall economic weakness and uncertainty on when businesses will reopen. For gross margin, sequential headwinds include foreign exchange, the mix within products, and the seasonal loss of leverage on our product business. Foreign exchange will have a 70 basis points impact sequentially and 130 basis points impact year over year. Regarding product mix, keep in mind the commentary we provided at the revenue level. Sequential tailwinds include cost savings and the mix shift towards services. With regard to capital allocation, our approach remains unchanged. We continue to invest confidently in our future while also returning value to our shareholders. We are in the midst of developing our most exciting pipeline of products and services ever, while contributing over $350 billion to the U.S. economy and expanding our footprint in many cities around the country over a five-year period. We also continue to believe that there is great value in our stock and we are maintaining our target of reaching a net cash neutral position over time. As a testament to the confidence we have in our business today and into the future, our board has authorized $50 billion for share repurchases in addition to the over 40 billion authorization remaining under the current share repurchase plan. Our board has also authorized a 6% increase in our quarterly dividend and today declared a cash dividend of 82 cents per share of common stock payable on May 14, 2020 to shareholders of Blackhood as of May 11, 2020. Finally, and most importantly, we are managing Apple for the long term, as we've always done. During uncertain times historically, we have continued to invest in the business, and this remains our philosophy. We will continue to stay focused on what we do best, investing in our product and service pipeline, managing the business wisely, and taking care of our teams, and believe we will come out from this stronger. With that, let's open the call to questions.

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

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

Thank you very much for taking my question, and I hope everyone as well. Kim, you talked about seeing some improvement in the second half of April, so I was wondering if you could just talk maybe a bit more on the segment, a geographic basis, you know, what you were seeing in the various regions that you're selling in and what you're hearing from your customers. And then I have a follow up. Thank you.

Sure, Shannon. If you look at, I'll start with China. If you look at what happened in China, we were having a really good January. The lockdown started there toward the end of January, as you know. February, we saw a steep decline in demand. We closed our stores in February. As the lockdown completed in mid-February, toward the second half of February, We began to open stores. We opened them on a staggered basis that took about 30 days until mid-March. And from a demand point of view, we saw then improvement in March over February. And if you look at kind of where we are today, we've seen further improvement in April as compared to March. And so that's China. If you look at the rest of the world, We were doing great in January, the first five weeks of the quarter. And we do believe that we were headed toward the sort of the top end of our expectations that we had talked to you about on the last call. that the next five weeks were spent reacting and getting the supply chain back up in full force and working through the sharp decline in China that I already talked about. The real thing for the rest of the world happened in March when the shelter-in-place orders went in and the work from home began. For those two, three weeks period, At the end of the quarter, we saw a sharp decline in demand. If you now step out into April and look at that, early April started like the end of March, but in the second half of April, we've seen an uptick across, really across the board. It's not just related to a certain GO or a certain product. We think by looking at it, a part of it is due to just our new products. A part of it is due to the stimulus programs taking effect in April. And then a part of it is probably the consumer behavior of knowing this is going to go on for a little while longer and getting some devices and so forth lined up to work at home more, in particular for As I think Lucas shared, we believe that iPad and Mac are going to improve on a year-over-year basis during this quarter. And that's customers that are either taking online education or working remotely. And so complex answer to your question, but that's what we're saying.

Thank you. That was helpful. Luca, unless I missed it, you talked about various puts and takes in the quarter, but didn't really discuss operating expenses. I know you mentioned some cost savings on the COGS line. I'm curious how you're thinking about your spending in OPEX given some of the macro challenges that you may be facing. Thank you.

As well, Shannon, as we said, you know, we manage the company for the long term, right? So we know that, you know, the core of the business, the core of the company is innovation and product and services development. So we will continue to invest in our pipeline. We're very excited about what we have in store. And so we will continue to invest there. Obviously, we are aware of the environment and so we will manage the SG&A portion of the company tightly. We are making new investments in the new services that we launched recently. We, as you know, we purchased the baseband activities from Intel and obviously we want to develop that technology because we consider it's a core technology for us. And so we will try to balance, you know, the need to continue to invest during difficult circumstances and the fact that, you know, we like to manage the business wisely.

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

That will be from Wamsi Mohan with Bank of America.

Yes, thank you. Tim, I think I speak for everyone on the call that we're all really appreciative of Apple's contribution during this pandemic. We all appreciate it. Thank you very much for that. No, it's been great. Tim, in past downturns, we have not really seen Apple pull back from investing and you as a company have largely maintained the product introduction cadence. But given these are unprecedented times and there are a lot of challenges associated with product development during a time when you have a global footprint for such activities and unable to really do a lot of things in person, how should we think about the product development and introduction cadence as we go over the next several quarters? And I will follow up.

Well, we're continuing to operate and so as you can tell along with everything else going on, we were able to launch and ship the iPhone SE the iPad Pro with the Magic Keyboard and the MacBook Air. And so business continues and the new products are our lifeblood. And so we're continuing to work. Everybody's getting used to the work at home. In some areas of the company, People may be 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 and are working because we know that our customers want the products that we've got, they're even more important in these times.

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. And or do you think that there could be other steps like bundling that you will consider versus what you already currently do? Thank you.

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 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.

Thanks, Wong-Z. Can we have the next question, please?

That will come from Morgan Stanley's Katie Huberti.

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's even more areas of inspiration and creativity coming out of the company. And then I would follow up.

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 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 on in 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've 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.

Okay. 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?

Well, let me answer that, Katie. 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 sharing purchases. The 50 billion is in addition that is still remaining from the past authorization that we've received from our board, right? So 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, you know, 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.

Thank you. Be well.

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

That will come from Amit Daryanani with Evercore.

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 or not in that expectation?

But 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. And in fact, if you look back on 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 I believe, 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. So you could conclude from that, that we were within within a target range.

That's really helpful. And let's just follow up. You know, 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 that we've gone to over the last 12 months. How do you think about that? And do you feel comfortable that the supply chain and the manufacturing base It's well situated today to launch the traditional product that they use to get it from Apple.

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 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.

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

We'll hear from Joriel Ung with Deutsche Bank.

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

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 and 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 sign with our customers when they purchase our devices. Both these businesses have been affected, obviously, by the store closures, not only our retail stores, but also our partners' points of sale. And obviously, they reduce level of customer traffic because of the social distancing measures, right? And we do expect AppleCare to be affected during the, 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 services business.

Got it. Appreciate that. My second question comes about the overall purchasing decisions that consumers are making. So far through April, have you seen increased, perhaps, downticks across your product line? So, for example, somebody might have, you know, shipped maybe towards the lower end of the storage mix of certain products. And do you expect that going forward as you know, unemployment uptick and macro impacts kind of later on through the rest of 20.

Thanks. 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 Android. And 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.

Thanks, Jerry. Can we have the next question? Thanks, guys.

That will be from JP Morgan's Summit Chatterjee.

Hi, thanks for taking the question. So if I can just start with the question on kind of what you're seeing in China, you mentioned kind of the pickup in activity, but is that driven by more kind of football in the stores or what you're seeing related to online activity and how much of this recovery is being driven online? Any thoughts on that?

Yeah, 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 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've mentioned earlier in my remarks, the – and 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, 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.

Got it. And 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're expecting any change in terms of the geographic mix of where the demand comes from relative to typically what you see for other iPhones in the lineup just given the lower price point.

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, you know, some fair number of people switching over. to iOS. And 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.

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

Certainly our last question today will be from Chris Casso with Raymond and James.

Yes, thank you. 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?

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 SC 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.

Okay, 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 uh... what you expect as you go through the year perhaps in in this new environment and again whether that turned into a tailwind or headwind for the rest margins as you go into the second half.

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. Yep.

Thank you, Chris. A replay of today's call will be available for two weeks on Apple podcasts as a webcast on apple.com slash investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 322-9513. These replays will be available by approximately 5 p.m. Pacific time today. Members of the press with additional questions can contact Kristen Huguette at 408-974-2414. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us.

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