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Apple (AAPL) Q1 2017 Results - Earnings Call Transcript

Seeking Alpha logo Seeking Alpha 2/1/2017 SA Transcripts

Apple, Inc. (AAPL)

Q1 2017 Earnings Call

January 31, 2017 5:00 pm ET

Executives

Nancy Paxton - Apple, Inc.

Timothy Donald Cook - Apple, Inc.

Luca Maestri - Apple, Inc.

Analysts

Kathryn Lynn Huberty - Morgan Stanley & Co. LLC

Amit Daryanani - RBC Capital Markets LLC

Shannon S. Cross - Cross Research LLC

Earnings Call Transcripts© Provided by Seeking Alpha Earnings Call Transcripts

Brian J. White - Drexel Hamilton LLC

Simona K. Jankowski - Goldman Sachs & Co.

Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC

Steven M. Milunovich - UBS Securities LLC

Presentation

Operator

Good day, everyone, and welcome to this Apple Incorporated first quarter fiscal year 2017 earnings release conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma'am.

Nancy Paxton - Apple, Inc.

Thank you. Good afternoon and thanks to everyone for joining us today. Speaking first is Apple CEO Tim Cook, and he'll be followed by CFO Luca Maestri. And after that, we will open the call to questions from analysts.

Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2016 and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.

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

Timothy Donald Cook - Apple, Inc.

Thank you, Nancy, and good afternoon, everyone, and thanks very much for joining us.

I'm very happy to share with you the outstanding results of Apple's December quarter. We generated the highest quarterly revenue in Apple's history along with all-time unit and revenue records for iPhone and Apple Watch, all-time revenue records for Services and Mac, and all-time revenue records for four out of our five geographic segments. The strong performance of our business also produced all-time record earnings per share.

Revenue in the quarter was $78.4 billion, which was above the top of our guidance range. iPhone had a tremendous quarter thanks to exceptional demand that beat our own internal expectations. While iPhone 7 is our most popular model, we saw especially strong demand for iPhone 7 Plus, which was a higher portion of the new product mix than we've ever seen with Plus models in the past. Demand for iPhone 7 Plus exceeded supply throughout the quarter, and we came into supply/demand balance in January.

iPhone 7 Plus has earned rave reviews for its advanced new features, especially the dual camera system, which produces stunning portraits and high-quality zoom. This is a uniquely Apple feature that is surprising and delighting our users. Both iPhone 7 and iPhone 7 Plus are empowering our customers to be more productive, more engaged, and more expressive than ever by integrating hardware, software, and services to create experiences that only Apple can deliver.

It was our best quarter ever for Services, with almost $7.2 billion in revenue. App Store customers broke all-time records during the holiday quarter, including $3 billion in purchases in December alone, making it the App Store's single best month ever.

Our innovative and vibrant developer community has created over 2.2 million apps for doing almost anything that you can imagine. Apple's developer community has now earned over $60 billion, including over $20 billion in 2016 alone.

Revenue from our music business grew for the third quarter in a row, and our AppleCare and iPlus storage services had all-time record results.

Apple Pay continued its strong momentum, with the number of users more than tripling over the past year and hundreds of millions of transactions and billions of dollars in purchases in the December quarter alone. Transaction volume was up over 500% year over year as we expanded to four new countries, including Japan, Russia, New Zealand, and Spain, bringing us into a total of 13 markets. Apple Pay on the Web is delivering our partners great results. Nearly 2 million small businesses are accepting invoice payments with Apply Pay through Intuit QuickBooks Online, FreshBooks, and other billing partners. And beginning this quarter, Comcast customers can pay their monthly bill in a single touch with Apple Pay.

Services are becoming a larger part of our business, and we expect the revenues to be the size of a Fortune 100 company this year. Our Services offerings are now driving over 150 million paid customer subscriptions. This includes our own services and third-party content that we offer on our stores. We feel great about this momentum, and our goal is to double the size of our Services business in the next four years.

The Mac not only returned to growth but generated its highest quarterly revenue ever. Our latest data shows that most Mac customers are buying their first Mac, with the vast majority of them coming from a Windows PC.

The new MacBook Touch with Touch Bar is an outstanding example of the innovation made possible by integrating world-class hardware and software. We were supply constrained for the new MacBook Pro throughout the December quarter and are just now coming into supply/demand balance.

It was also our best quarter ever for Apple Watch, both units and revenues, with holiday demand so strong that we couldn't make enough. Apple Watch is the best-selling smartwatch in the world and also the most loved, with the highest customer satisfaction in its category by a wide margin. Apple Watch is the ultimate device for a healthy life, and it is the gold standard for smartwatches. We couldn't be more excited about Apple Watch.

We're also thrilled with the response to AirPods. Customers love the magical experience AirPods are delivering. And if you haven't tried them yet, you'll be delighted when you do. They're far ahead of anything else on the market today, and we're working hard to catch up with the incredible demand.

With AirPods off to a fantastic start, a strong full first year for Apple Watch, and Beats headphones offering a great wireless experience using the Apple-designed W1 chip, we now have a rich lineup of wearable products. Their design, elegance, and ease of use make us very excited about the huge growth potential for wearables going forward.

Our ecosystem is broadening to more and more of the areas where people spend their time, at the gym, on the go, in the home, and on the job. For example, every major automaker is committed to supporting CarPlay with over 200 different models announced, including five of the top 10 selling models in the United States. There are well over 1 million people using CarPlay now, and this continues to grow rapidly.

And we are leading the industry by being the first to integrate home automation into a major platform with iOS 10. With Siri and a new home app in iOS 10, everywhere you go, you can easily and securely control all of your home accessories with your iPhone, iPad, or your Apple Watch.

The number of HomeKit-compatible accessories continues to grow rapidly, with many exciting solutions announced just this month, including video cameras, motion detectors, and sensors for doors, windows, and even water leaks. Perhaps even more importantly, we are unmatched when it comes to securing your home with HomeKit-enabled door locks, garage doors, and alarm systems.

I'm personally using HomeKit accessories and the Home app to integrate iOS into my home routine. Now when I say good morning to Siri, my house lights come on and my coffee starts brewing. When I go to the living room to relax in the evening, I use Siri to adjust the lighting and turn on the fireplace. And when I leave the house, a simple tap on my iPhone turns the lights off, adjusts the thermostat down, and locks the doors. When I return to my house in the evening, as I near my home, the house prepares itself for my arrival automatically by using a simple geofence. This level of home automation was unimaginable just a few years ago, and it's here today with iOS and HomeKit.

We're making great progress in the enterprise market alongside our major partners. The combination of iOS and Cisco technology is giving companies everywhere the opportunity to vastly improve the user experience for their mobile employees. With enhanced networking performance, up to eight times faster roaming, better reliability for apps, and native voice experience, we're excited about how much more productive the workforce will be with these great capabilities. In fact, the total number of joint customer opportunities has grown over 70% since last quarter.

Enterprises are using IBM's new Mobile at Scale design and development model to deploy multiple iOS apps with speed and efficiency. For example, Finnair is transforming aircraft maintenance, and CMAX (10:05) is revamping activities from attracting new clients to invoicing to after-sales support. And later this spring, SAP will be rolling out its SDK for iOS, providing its community of more than 2.5 million developers the tools to build powerful native iOS apps that leverage the SAP HANA cloud platform. We're delighted with how these partnerships are making it even easier for enterprise customers to transform how work gets done with iOS.

As we reflect on a record-breaking December quarter, I'd like to thank our developers, our business partners, and our employees for their incredible contributions and commitment. And I'd like to thank all of our customers around the world for their excitement and loyalty, which ultimately drive these results.

Now I'd like to turn it over to Luca to talk about the quarter in more detail.

Luca Maestri - Apple, Inc.

Thank you, Tim. Good afternoon, everyone.

Revenue for the December quarter was $78.4 billion, the highest quarterly revenue in the history of Apple and above our guidance range. As Tim mentioned, the strength of our results was very broad-based, as we set new revenue records for iPhone, for Services, for Mac, and for Apple Watch. We also established new all-time revenue records in most developed and emerging markets, with strong growth rates in many countries, including the U.S., Japan, Canada, France, Australia, Brazil, India, Turkey, and Russia.

We accomplished all this despite a very challenging foreign exchange environment due to the continued strength of the U.S. dollar. As we had expected, our year-over-year performance in Greater China improved significantly relative to the September quarter. Total Greater China segment revenue was down 12%, but revenue from Mainland China was even with the all-time record results from a year ago and grew in constant currency terms. In all other geographic segments, we generated all-time quarterly record results.

We had the benefit of a 14th week during the quarter this year, but this was offset by four factors. First, this year we grew China inventory significantly less than a year ago. Second, iPhone 7 launched earlier in the September quarter compared to the iPhone 6s launch the previous year, creating a more difficult comparison for the December quarter this year. Third, the stronger U.S. dollar affected total revenue growth this year by 100 basis points. And fourth, our year-ago revenue included the benefit of a one-off $548 million patent infringement payment. Also, strong customer interest left us in supply/demand imbalance for several of our products throughout the quarter this year.

Gross margin was 38.5%, at the high end of our guidance range. Operating margin was 29.8% of revenue, and net income was $17.9 billion. Diluted earnings per share were $3.36, a new all-time record, and cash flow from operations was $27.1 billion.

We had a terrific quarter for iPhone as we sold 78.3 million units, a new all-time record and an increase of 5% over last year. Customer demand was even higher than our reported results, as iPhone unit sell-through was up 8%.

We saw double-digit iPhone growth in the U.S., in Canada, Western Europe, Japan, and Australia, and even stronger growth in many emerging markets, including Brazil, Turkey, Russia, Central and Eastern Europe, and Vietnam. iPhone ASP increased to $695 in the December quarter from $619 in the September quarter, driven by the very strong product mix and the amazing success of iPhone 7 Plus.

Despite stronger demand than last year, we added only 1.2 million units of iPhone channel inventory across the quarter, significantly less than the increase of 3.3 million units a year ago. And we exited the quarter near the low end of our 5 to 7-week target channel inventory range.

Customer interest and satisfaction with iPhone are exceptional, not only with consumers, but also with business users. In the U.S., for instance, the latest data from 451 Research on consumers indicates a 97% customer satisfaction rating among all iPhone owners and a 99% satisfaction rating for owners of iPhone 7 Plus. Among corporate smartphone buyers, the iPhone customer satisfaction rating was 94%. And of those planning to purchase smartphones in the March quarter, 78% plan to purchase an iPhone.

Turning to Services, we generated an all-time record $7.2 billion in revenue, an increase of 18% year over year. Our run rate growth was actually higher when taking into account two discrete items. On one hand, the 14th week added to Services revenue this December quarter. On the other hand, that benefit was more than offset by the comparison to the one-off $548 million patent infringement payment included in Services revenue a year ago.

The App Store continued its impressive run, breaking all previous revenue records. Year-over-year App Store revenue growth was 43% through the first 13 weeks of the quarter. It's great to see that both average revenue per paying account and the number of paying accounts grew strongly during the quarter. And according to App Annie's latest report, App Store revenue continues to outpace the industry overall, with more than double the revenue of Google Play in calendar 2016.

Next I would like to talk about the Mac. We sold 5.4 million Macs and generated our highest-ever quarterly Mac revenue. We were very happy to report double-digit unit growth in several countries, including Japan, Mainland China, India, the Netherlands, and Sweden, as well as in the U.S. education market. We ended the quarter at the low end of our 4 to 5-week target range for Mac channel inventory.

Turning to iPad, we sold 13.1 million units, which was ahead of our expectations. And we posted double-digit growth in both Mainland China and India, as we've expanded distribution channels in those countries and we continue to attract a very high percentage of first-time tablet buyers. We also reduced channel inventory by about 700,000 units as opposed to an increase of 900,000 units last year, and we exited the quarter near the low end of our five to seven-week target range.

iPad is incredibly successful in the segments of the tablet market where we compete, both in terms of market share and customer metrics. Recent data from NPD indicates that iPad had 85% share of the U.S. market for tablets priced above $200. And in November, 451 Research measured a 94% consumer satisfaction rate for iPad Mini, a 97% rate for iPad Air, and 96% for iPad Pro.

Among U.S. consumers planning to purchase a tablet within the next six months, purchase intention for iPad is more than four times higher than any other brand measured, with iPad Pro once again the top choice for planned purchases. Corporate buyers reported a 96% satisfaction rate and a purchase intent of 66% for the March quarter. In fact, businesses of all sizes are choosing iPad and iPhone to have them reimagine their everyday activities. We're seeing strong momentum in sectors such as retail, where iOS solutions are being deployed for everything from product development to logistics to mobile point-of-sale. Companies like Toys "R" Us, Coach, and Kate Spade are using iOS and our mobility partner solutions to dramatically transform their customer and employee experiences.

Our retail stores experienced strong double-digit growth in visitors and revenue in the December quarter. And we continued to expand our global presence, with plans to open our first store in Singapore and our second store in Dubai soon. We are continually updating our stores and adding new and exciting outreach programs to educate kids on our products, entertain the community with fresh live music, teach future Swift developers to code, and empower entrepreneurs to start, grow, and evolve their businesses.

Let me now turn to our cash position. We ended the quarter with $246.1 billion in cash plus marketable securities, a sequential increase of $8.5 billion. $230.2 billion of this cash or 94% of the total was outside the United States. We also had $77.1 billion in term debt and $10.5 billion in commercial paper outstanding at quarter end.

We returned almost $15 billion to investors during a very busy December quarter for our capital return activities. We paid $3.1 billion in dividends and equivalents. We spent $5 billion on repurchases of 44.3 million Apple shares through open market transactions. And we launched a new $6 billion ASR, resulting in an initial delivery and retirement of 44.8 million shares. We also completed our eighth accelerated share repurchase program, retiring an additional 4.4 million shares. This led to a net diluted share count reduction of 65.3 million shares during the quarter.

We've now completed $201 billion of our current $250 billion capital return program, including $144 billion in share repurchases. And we plan to provide investors with our annual update on the capital return program in the spring.

Our effective tax rate for the quarter was 26%, as expected.

And as we move ahead into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $51.5 billion and $53.5 billion. This guidance range includes a $1.2 billion year-over-year headwind from foreign exchange. We expect gross margin to be between 38% and 39%. This guidance range includes an 80 basis points sequential headwind from foreign exchange. We expect OpEx to be between $6.5 billion and $6.6 billion. We expect OI&E to be about $400 million, and we expect the tax rate to be about 26%.

Also today, our Board of Directors has declared a cash dividend up $0.57 per share of common stock, payable on February 16, 2017 to shareholders of record as of February 13, 2017.

With that, I'd like to open the call to questions.

Nancy Paxton - Apple, Inc.

And we ask that you limit yourself to one one-part question and one follow-up. Operator, may we have the first question, please?

Click here to read question and answer session

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