Apple’s CEO on the company’s 2019 Q1 earnings

Apple's first-quarter results for 2019 are in. Here's our transcript of the call.

Apple CEO Tim Cook and CFO Luca Maestri spoke with analysts during the company's Q1 2019 earnings call. Here's our ongoing live transcript of their remarks! If you want more info on Apple's results, we recommend checking out the awesome charts from Six Colors.

Cook's opening remarks

Tim Cook

Thank you, Nancy and thanks to everyone for joining us today. This isn't the first time you've heard from us regarding the December quarter so the first thing I want to do is provide some final results and connect those back to the letter we shared at the beginning of the month. As you know, our December quarter revenue was below our original expectations coming in at $84.3 billion. That's down 5% from a year ago or down 3% adjusting for foreign exchange. We noted four factors that would impact our results when we provided guidance in November: different iPhone launch timing from a year ago, FX headwinds, supply constraints on certain products, and macroeconomic conditions in emerging markets. One of those factors, weak macro conditions in some emerging markets, was significantly more severe than we originally foresaw, especially in Greater China. As our letter noted, that challenge was compounded by quarterly iPhone upgrades that were lower than we anticipated. We'll returned to upgrades in a moment, but I first want to say a bit more about our business in Greater China. Our revenue there was down by $4.8 billion from last year with declines across iPhone, Mac, and iPad. Most of the shortfall relative to our original guidance and over 100% of our worldwide, year over year revenue decline was driven by our performance in Greater China. Despite iPhone upgrades being lower than we anticipated, our business grew outside of China including new records in the Americas, Western Europe, Central and Eastern Europe, and our rest of Asia Pacific segment. We had record performance in large markets including the United States, Canada, Mexico, Germany, Italy, Spain, and Korea. In the letter we shared earlier this month, we said we are proud to participate in the Chinese marketplace and that we believe our business has a bright future there over time. But I think some of that got lost. So I want to share a bit more detail on the positives we see in China. We generated record December quarter services revenue in Greater China fueled by an amazing ecosystem with over 2.5 million registered iOS developers. We saw very strong results from our wearables business there with revenues up over 50%. We also continued to grow our total active installed base by adding new customers. In fact, more than two thirds of all customers in China who bought a Mac or an iPad during the December quarter were purchasing that product for the first time. Finally, for perspective, despite the challenging December quarter our revenue from China grew slightly for the full calendar year. Macroeconomic factors will come and go, but we see great upside in continuing to focus on the things that we can control.

Returning to iPhone, I'd like to talk about our results in the context of those lower than expected upgrades. iPhone XR, iPhone XS, and iPhone XS Max are by far the best iPhones we've ever shipped. They share advanced technologies, including the A12 Bionic, the most powerful chip ever in a smartphone with our next generation neural engine, capable of 5 trillion operations per second. These are also completely modern iPhones with stunning, large full screen displays and Face ID, the most secure authentication of any kind available in a smartphone. And the cameras are simply amazing with Portrait Mode and Depth Control to allow users to create studio-quality photos as well as stunning 4K video, opening a whole new era of photography. We couldn't be more proud of our iPhone lineup and our industry-leading customer satisfaction. We wouldn't change our position for anyone's. Now, our customers are holding on to their older iPhones a bit longer than in the past. When you paired this with the macroeconomic factors, particularly in emerging markets, it resulted in iPhone revenue that was down 15% from last year. Our iPhone results accounted for significantly more than our entire year over year revenue decline. In fact, outside of iPhone our business grew strongly by 19%. So what's behind this? It's important to understand what's going on from the customer perspective at the point of purchase. We believe that is the sum of several factors. First, foreign exchange: The relative strength of the U.S. dollar has made our products more expensive in many parts of the world. In Turkey, for example, the lira depreciated by 33% over the course of calendar 2018 and in the December quarter our revenue there was down by almost $700 million from the previous year. Second, subsidies: For various reasons, iPhone subsidies are becoming increasingly less common. In Japan, for example, iPhone purchases were traditionally subsidized by carriers and bundled with service contracts. Competitive promotional activity frequently increased the amount of subsidy during key periods. Today, local regulations have significantly restricted those subsidies as well as related competition.

ComScore shows that Apple News has the largest audience of all news apps and the international audience will continue to grow with our first ever bilingual launch in Canada, available to customers later this quarter. In summary, we're very happy not only with the growth but also the breadth of our services portfolio. Our revenue from services has grown from less than $8 billion in calendar 2010 to over $41 billion in calendar 2018. The largest category represents less than 30% of total services revenue and the new services we've launched in the last few years are all experiencing tremendous growth.

We had our best quarter ever for Mac revenue which was up 9% fueled by our new MacBook Air and Mac Mini introduced in October. The MacBook Air includes a beautiful new Retina Display, Touch ID, and Force Touch trackpad, while the new Mac Mini provides a powerful, flexible solution for everything from home automation to giant render farms.

iPad revenue was up 17%, its highest growth rate in almost six years. Powered by the new iPad Pro released in November with its edge to edge Liquid Retina Display, Face ID, and A12X Bionic chip, the new iPad Pro has been described by reviewers as a tablet with no equal and the most powerful mobile device ever made.

We also had our best quarter ever for wearables, home, and accessories with 33% growth in total and almost 50% growth from wearables, thanks to strong sales of both Apple Watch and AirPods.

We don't measure our success in 90-day increments. We manage Apple for the long term and when we consider the keys to our success over time there are three that stand out: our highly satisfied and loyal customers, our large and growing active installed base, and at the heart of it all our deeply ingrained culture of innovation. Thanks to all this, our ecosystem is stronger than ever before. We have an amazingly talented team creating hardware, software, and services optimizing each of them to create an unparalleled user experience. Apple Watch is a powerful example of that. It's humbling to read e-mails from customers around the world telling us how Apple Watch has dramatically changed their lives by motivating them to be more fit and active, by alerting them to potentially serious health conditions such as A-Fib, and by helping them in times of crisis with features like Fall Detection and Emergency SOS. We believe we are just beginning to see the impact we can make to improving health and are deeply inspired by the possibilities. Another example is the work we're doing with silicon. We've embedded machine learning directly into the silicon with our A12 Bionic chip. Our custom neural engine not only provides power efficiency and incredible performance in a very small package, but it also enables processing of data and transactions directly on the device. This means iPhone can recognize patterns, make predictions, and learn from experience and it does all this while keeping personal information private. This is a powerful example of how innovation and privacy can go hand in hand at a time when these issues are increasingly important to our users.

We are undertaking and accelerating a number of initiatives to improve our results. It's not in our DNA to just stand around and wait for macroeconomic conditions to improve. One such initiative is making it simple to trade in an iPhone in our stores and raising awareness of this opportunity. Because of the quality and durability of iPhones, they maintain significant residual value making trade ins a great opportunity. It's not only great for the environment, it's great for the customer, as their existing phone acts as a subsidy for their new phone and it's great for developers, as a phone that is traded in and redistributed can help grow our active installed base. Beginning last week, we started making it easier for people to pay for their phones over time with installment payments and we're working on rolling out this program to more geographies as soon as we can. We are as confident as ever in the fundamental strength of our business and we have a very strong pipeline of products and services with some exciting announcements coming later this year. Apple innovates like no other company on Earth and we are not taking our foot off the gas. We'll continue to invest through near-term headwinds just as we always have and will emerge stronger as a result. Now for more details on our December quarter results I'd like to turn the call over to Luca.

Luca Maestri provides more detail on the quarter

Luca Maestri

Thank you, Tim. Good afternoon everyone. As Tim said, revenue for the December quarter was $84.3 billion. This result was below our expectations but we were able to set new all time revenue records in the U.S., Canada, Latin America, Western Europe, Central and Eastern Europe, and Korea. Results were especially strong in the U.S. where revenue was up by more than $1.5 billion compared to a year ago and in several markets where revenue grew by double digits including, among others, Germany, Spain, Poland, Mexico, Malaysia, and Vietnam. Looking at product categories iPhone revenue declined 15% from a year ago where revenue from the rest of our business grew 19%, an all time record, including our best results ever for services, for wearables, and for Mac. Company gross margin was 38%. This quarter for the first time we're making an important new disclosure to our investors, as we believe it will foster a better understanding of our business. We are now reporting, on a quarterly basis, gross margin for products in aggregate and for services in aggregate. Products gross margin was 34.3% and services gross margin was 62.8%. On a sequential basis, products gross margin increased 60 basis points due to positive leverage from the holiday quarter partially offset by higher cost structures as we launched several new products and by headwinds from foreign exchange. Services gross margin also increased 170 basis points sequentially due to favorable mix and leverage partially offset by foreign exchange. While both products and services gross margins improved sequentially, total company gross margin was down 30 basis points due to a different mix between products and services. Net income was $20 billion, about flat to last year, and diluted earnings per share with an all time record at $4.18 an increase of 7.5% over last year. Operating cash flow was also very strong at $26.7 billion.

Let me provide more color for the various products categories. iPhone revenue was $52 billion. On a geographic basis most of the decline from last year came from Greater China and other emerging markets where difficult macro and foreign exchange conditions affected our results. We also believe that the reduction of carrier subsidies and our battery replacement program had an impact in a number of countries around the world. And as Tim mentioned we had a lower number of upgrades than we had anticipated at the beginning of the quarter. However, our global active installed base of iPhones continues to grow and has reached an all time high at the end of December. We are disclosing that number now for the first time and it has surpassed 900 million devices up year over year in each of our five geographic segments and growing almost 75 million in the last 12 months alone. We plan to provide information on the iPhone installed base as well as total installed base on a periodic basis. Customer satisfaction and loyalty for iPhone continue to be outstanding and are the highest in the industry. The latest survey of U.S. consumers from 451 Research indicates customer satisfaction of 99 percent for iPhone XR, XS, and XS Max combined. And among business buyers who plan to purchase smartphones in the March quarter, 81% plan to purchase iPhones. Based on the latest information from Kantar. iPhone experience a 90% customer loyalty rating for iPhone customers in the U.S., 23 points above the next highest brand measured. Turning to services, it was our best quarter ever with revenue of $10.9 billion, up 19% year over year with new December quarter records in all five of our geographic segments. Many services categories set new all time revenue records and we are on track to achieve our goal of doubling our fiscal 2016 services revenue by 2020. To be clear, and as we have already explained 90 days ago, our 2020 goal remains unchanged and it excludes the impact of the revenue reclassification between products and services we recorded in connection with ASC606, the new revenue recognition accounting standard, that we adopted at the beginning of fiscal '19. The level of engagement of our customers in our ecosystem continues to grow. The number of transacting accounts on our digital stores reached a new all time high during the quarter with the number of paid accounts growing by strong double digits over last year. And we now have over 360 million paid subscriptions across our services portfolio, an increase of 120 million versus a year ago. Given the continued strength and momentum in this part of the business, we now expect the number of paid subscriptions to surpass half a billion in 2020. Our subscription business has become very large and diversified covering many different categories from entertainment, to health and fitness, to lifestyle. In fact, more than 30,000 third-party subscription apps are available today on the App Store and the largest of them accounts for only 0.3% of our total services revenue. Next I'd like to talk about the Mac. We saw great response to the new MacBook Air and Mac Mini that we introduced in October which helped drive a 9% increase in Mac revenue over last year to a new all time record. Mac revenue was up in the vast majority of countries we track, with double digit growth in many large markets, such as the U.S., Western Europe, Central and Eastern Europe, Japan, Korea, and South Asia. Our active installed base of Macs reached a new all time high and half of all the customers purchasing Macs in the December quarter were new to Mac. We also have great results for iPad. With revenue up 17% percent from a year ago and strong performance of both iPad and iPad Pro and generated double digit growth in four of our five geographic segments. Similar to the Mac, our installed base of IPads reached a new all time high and among customers purchasing iPad during the quarter, half were new to iPad. The most recent consumer survey from 451 Research measured a 94% customer satisfaction rating for iPad overall with iPad Pro models scoring as high as 100%. Among business customers who plan to purchase tablets in the March quarter 68% plan to purchase iPads. Wearables, home, and accessories revenue grew 33% to an all time record in each of our geographic segments. Revenue from this category was up over $1.8 billion compared to a year ago thanks to the amazing popularity of Apple Watch and AirPods, both of which were supply constrained as we exited the quarter. Based on revenue over the past four quarters our wearables business is approaching the size of a Fortune 200 company. Our retail and online stores generated strong results from Mac and iPad and all time record performance from services and from wearables. Following the launch of the new iPhone trade-in campaign, our stores more than doubled the volume of iPhones traded in compared to last year reaching an all time high in Q1. We added Thailand to our footprint with a beautiful store in Bangkok and we opened a stunning new store in Champs-Élysées in Paris exiting the quarter with 506 physical stores in 22 countries.

Stay tuned! We will continue to update this page with a transcription of the earnings call.