Good day, and welcome to the Apple Incorporated Third Quarter Fiscal Year 2019 Earnings 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.

Thank you. Good afternoon, and thanks to everyone for joining us today. Speaking first is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll 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, capital allocation, 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 most recently filed periodic reports on Form 10-K and Form 10-Q, 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.

Thank you, Nancy. Good afternoon and thanks to all of you for joining us today. We're thrilled to report a return to growth and new June quarter revenue record of $53.8 billion. We saw significant improvement in year-over-year iPhone performance compared to last quarter, very strong performances for both Mac and iPad and absolutely blowout quarter for Wearables, but we had accelerating growth of well over 50% and a new high watermark for services, where we set an all time revenue record of $11.5 billion. When you step back and consider Wearables and services together two areas where we have strategically invested in last several years, they now approach the size of a Fortune 50 company. Geographically, we are happy with our performance across the board including a return to growth in Mainland China. We accomplished these results despite strong headwinds from foreign exchange which impacted our top-line growth rate by 300 basis points compared to a year ago that's equivalent to about $1.5 billion of revenue. Importantly, in constant currency, our revenue grew in all five of our geographic segments. For iPhone, we generated $26 billion in revenue, while this is down 12% from last year's June quarter, it is a significant improvement to the 17% year-over-year decline in Q2. We are encouraged by the results we are seeing from the initiatives that we spoke about in January including strong customer response to our in-store trade-in and financing programs. In fact, iPhone our retail and online stores returned to growth on a year-over-year basis in the month of June. Our active installed base of iPhone reached a new all time high and was up year-over-year in each of our top 20 markets underscoring the quality of our products and the satisfaction and loyalty of iPhone customers around the world.…

Thank you, Tim. Good afternoon everyone. We're happy to report a June quarter revenue record of $53.8 billion, up 1% year-over-year. We return to growth in spite of a difficult foreign exchange environment around the world, which impacted our year-over-year growth rate by 300 basis points. We set June quarter revenue records in the Americas, in Japan and the rest of Asia Pacific and as Tim mentioned earlier all our geographic segments grew in constant currency. Overall, products revenue was $42.4 billion, down 2% year-over-year, which is significantly better than the 8% decline in products revenue that we experienced during the first half of the fiscal year. Product categories outside of iPhone grew 20%, with strong results in Wearables, Mac and iPad. Services revenue grew 13% to a new all-time record of $11.5 billion. Excluding the one-time item, we highlighted a year ago in connection with the final resolution of various lawsuits, services revenue growth was 15% and 18% in constant currency terms. On a geographic basis, we saw marked improvement in our year-over-year comparisons from emerging markets relative to the first half of this fiscal year, particularly in the BRIC countries, where year-over-year performance went from a 25% revenue decline in the first half to 3% growth in the June quarter. We set June quarter revenue records in several major developed markets, including the U.S., Canada, Germany, France, Japan, Australia and Korea. In emerging markets, we returned to growth in Mainland China, grew strong double digits in India and Brazil and we set new Q3 records in Thailand, Vietnam and the Philippines. Company gross margin was 37.6%, flat sequentially and in line with our guidance. Products gross margin was 30.4% down about 80 basis points sequentially due to seasonal loss of leverage and product mix partially offset by favorable…

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

The first question will come from Amit Daryanani from Evercore.

Thanks a lot. Thanks for taking my question guys. I guess, two from me. First off, could you just talk about, when I think about the September quarter guide, it's implied I think up 16% or so sequentially. Historically, at least, in that guide has been in the 10% low double-digit kind of range. Just can you help us understand, what gives you the confidence for a better than seasonal guide in September, either from a geo or product basis would be helpful.

Amit, it's Luca. Of course, this is our best estimate of where we think we will land. Clearly, we expect to have continued strong growth from the non-iPhone categories. We have great momentum in wearables. We mentioned that we were up almost 50% in the June quarter, or actually over 50% in the June quarter. Our services business, we set an all-time record in June. And so, these two categories have become really important and really large for us. And so, as we continue to grow, quickly that is going to help us as we go through the year. Keep in mind that the guidance includes an estimated almost $1 billion of foreign exchange headwind for the quarter.

Fair enough. That's really helpful. And I guess if I just follow-up on China, impressed to see the continued recovery you guys are seeing that despite all the headlines that are out there. Just curious, what are the few things that are driving the success in China, and how sustainable do you think those changes are for Apple as you go forward.

Yes, Amit, Hi. It's Tim, and I apologize for my voice, I'm suffering from an allergy. But what happened last quarter in China was a confluence of things. The government stimulus, this came in terms of a VAT reduction, a very bold one. We took some pricing action, we instituted our trade-in and financing programs in our retail stores and worked with certain channel partners on that as well. And we're seeing a growing engagement with the broader Apple ecosystem during the quarter. And so, when you look at it, each of our categories, iPhone, iPad, Mac, wearables, services, everything improved sequentially. So, we couldn't be happier with the progress. I would point out, I think I mentioned in my comments, that we actually grew in constant currency for Greater China and we grew in Mainland China on a reported basis. So, there's several things going on there that are quite positive.

Thank you, Amit. Could we have the next question please.

The next question will come from Shannon Cross with Cross Research.

Thank you very much. Can you talk a bit about what's going on within services, some of the puts and takes? Luca, you gave us some color in terms of the growth rates in that, but I'm just curious and I know you won't talk about future products, but as you think about the opportunity, you think about what you've got now and in the future and then some of what’s been going on with China and that, is this something that could reaccelerate, or again, the 18% on a constant currency basis is obviously quite strong. But, how are you thinking about it?

Yes. I think it's important to start with that 18% in constant currencies, Shannon. Our reported results are on a normalized basis, removing the one-time item from last year, was 15%. Clearly FX, plays a role around the world, 300 basis points of FX impact during the June quarter. In spite of that, it was an all-time record revenue. Our installed base continues to grow. It's growing in every geography and it's growing across all our major product categories, and that is very, very important for the services business. I would say, I'll give you a bit more color around two offsetting factors around this performance during the June quarter. On one side, the App Store, I mentioned in my prepared remarks that growth accelerated sequentially. We had double-digit growth on the App Store in every geography. In China, we saw significant acceleration. As you know, we tend to monetize in China on the App Store through game titles and the government has approved a few key game titles during the quarter. That has helped our performance there. On the other side, AppleCare, I mentioned AppleCare was an all-time record in June, so really strong performance, but our growth has decelerated in AppleCare due to factors that we fully expected, because we are comping this expansion of our coverage for AppleCare that we've had significant success during the last 18 to 24 months in really broadening our coverage of AppleCare around the world with some key partners, carriers and resellers. And obviously, as we go through the year those comps become a bit more difficult. Having said all that, that we've given ourselves a couple of targets and we feel very confident about reaching those targets. The first one is that, we wanted to double the size of the services business from our fiscal 2016 to 2020. We are on our way there. Paid subscriptions is another target, is important to us. It's an important way for us to monetize our ecosystem. We set a target of surpassing 0.5 billion paid subscriptions on the ecosystem during 2020. We’re already at 420 million now. So, we feel confident there. And of course, as you mentioned, we're very excited about the fact that we're going to be launching new services soon. As Tim said, we're starting the rollout of Apple Card in August, and there's two more very important services that we’re going to be adding to our portfolio during the fall. One is Apple Arcade, which is our gaming subscription service, and then of course Apple TV+, which is our video streaming service. So obviously these services will help us carry on with the momentum that we had in services.

Great. Thank you. And this is probably for you too as well, Luca. Can you talk about gross margin? The guidance was pretty solid. Obviously, there are various things that are at play here. I know you mentioned $1 billion worth of top-line impact, I think from, currency last quarter. Then maybe if you can kind of talk about what went into your gross margin guidance.

Yes. So of course, Shannon, as you've seen, our guidance for margin is 50 basis points higher than the guidance that we had given for June. I would say on the positive, we expect to benefit from leverage. As you've seen from our revenue guidance, and from cost savings, because as you know the commodity environment is fairly favorable right now. On the negative side, the headwind on gross margins on a year-over-year basis from foreign exchange is about 100 basis points. And so, we need to keep that in mind. But we feel pretty good about the guidance we provided.

Thanks Shannon. Could we have the next question please.

Our next question will come from Katy Huberty with Morgan Stanley.

Yes. Thank you. I'd like to go back to the discussion around strength in China in the quarter and understand what linearity looked like. I ask because there was some industry data around the smartphone market in China that seemed to deteriorate in the month of June, the App Store data deteriorated a little bit in June, and just curious if that’s something you saw in the business and if it at all informs your outlook around the pace of the China business as you go into September.

Katy, it's Tim. We obviously took into account all of the information that we had and coming out with the guidance including linearity across last quarter and how this quarter has started. And so, we obviously look at that in quite much detail.

And then just on the App Store, appreciate there's not a lot of detail out around exact timing and even some pricing of the new services, but how should we think about the new services that launched in March impacting the overall services growth. Does that start to benefit the model in the back half of this calendar year, or will the impact be more longer term in nature and really show up in 2020?

Katy, let me just talk about the new services that we've announced in March, and then also about the timing of how we get to revenue, right? We've announced Apple News+, and this is the service that is available for consumers right now. We've announced our channel service, which has also become available a few weeks ago. The other three services, the card is launching in August, the gaming service and the video service are starting in the fall. Keep in mind for all these services, there's a trial period up front, there's going to be different trial periods, we'll see what that what they look like. So, the road to monetization takes some time. Obviously, all of them will add to our base and will help us with growth rates as we get into next year.

Thank you, Katy. Could we have the next question please?

The next question will come from Krish Sankar with Cowen & Company.

Hi. Thanks for taking my question. I have two of them. First one, on the iPhone trade-in program, how effective was it and what percentage of the iPhone sales came from the trade-ins and are there any other geographies where you are left to rule it out? Then, I have a follow-up.

Hi, it's Tim. In retail, it was quite successful. We got going in a larger way during that quarter, we were pretty much just ramping in the previous quarter. And trade-in as a percentage of their total sales is significant and financing is a key element of it. Those two things in the aggregate led the combination of retail and online, just short form that is retail Apple Store let to growth in June trajectory. We are obviously taking those programs and advocating those more widely and that is at different levels of implementation throughout different geographies. Because we're working with our carrier partners on those and retail partners.

Got it. Got it. That's pretty helpful, Tim. And then, a follow-up for you, a much longer-term question. I understand we're in the very early innings of the services growth story. Is there a way to think about it down the road, 3 or 5 years down the road, would the services growth still be tethered to the hardware of the iPhone, or do you think at some point down the road services would be independent by itself and not really tied to your hardware installed base?

Well, there are elements today that are not necessarily tethered to iPhone, right? We have other products where people are both purchasing things, they're watching Apple TV. We offer Apple Music on Android, and so there's a series of things that are outside of that. And so we'll see what we do in the future. I don't want to really get into that. But, more broadly, to answer your question about growth as we go forward, the way I see it is, we have the strongest hardware portfolio ever, we've got new products on the way, the pipeline is full of great new stuff both on the product and the services side. We're very fortunate and work very hard to have loyal customers and to continue attracting an impressive number of switchers. The installed base is growing, hit a new record, that's obviously good. And it hit a new record across all geographies and across all categories. And so, this is a really good thing. And we've got the Wearables area that is doing extremely well. We stuck with that when others perhaps didn't and really put a lot of energy into this and a lot of R&D and are in a very good position today to keep playing out what's next there. At the same time, on the market side, we have emerging markets where we have low penetration. And during the quarter tactically the emerging markets had a bit of a rebound. And in fact, on a constant currency basis, we actually grew slightly in emerging markets. We still declined on a reported basis. India bounced back. During the quarter, we returned to growth there. We're very happy with that. We grew in Brazil as well. We're also continuing to focus on the enterprise market. Luca mentioned some of this in his comments and we think that continues to be a big opportunity for us. And then, we've got lots of what I would call core technology kinds of things like augmented reality, where we're placing big bets and bet that we have a big future, in addition to the health kinds of things that may fall out of the watch. And so hopefully that kind of gives you a view over the total. And so, we're focusing on products and services and there will be some services that aren't hooked and some that are hooked not on current period sales mostly, very much services are rarely connected on that today or at least not a high percentage by any means there. They're more correlated to the active installed base and also the level of transacting customers that are there and the amount per customer, which relates also to the offering that we have.

Thank you, Krish. Could we have the next question, please?

Next, we will go to Wamsi Mohan with Bank of America Merrill Lynch.

Yes. Thank you. Tim, the China trade situation remains sort of fluid over here and more recently you asked for some tariff exceptions were not granted those. How are you thinking about the longer-term footprint for manufacturing and can you talk about any potential alternatives that you've looked at and considered in moving parts of production potentially out of China. And I have a follow-up.

Yes. I know there's been a lot of speculation around the topic of different moves and so forth. I wouldn't put a lot of stock into those, if I were you. The way I view this is, the vast majority of our products are kind of made everywhere. There's a significant level of content from the United States and a lot from Japan to Korea to China and the European Union also contributes a fair amount. And so, that's the nature of a global supply chain. Largely, I think that will carry the day in the future as well. In terms of the exclusions, we've been making the Mac Pro in the U.S., we want to continue doing that. And so, we're working and investing currently in capacity to do so, because we want to continue to be here. And so that's what's behind the exclusions. And so, we're explaining that and hope for a positive outcome.

Okay. Thanks, Tim. And there is, Luca, maybe for you, there's been some significant destocking of inventory in the first calendar half of this year in iPhone. Can you comment about the broader channel inventory levels where you are in your typical ranges, especially given the comment around June iPhone sales being quite strong and do you expect anything atypical in channel inventory dynamics in the September quarter? Thank you.

Yes, Wamsi, as you know we're not getting into this topic very much. But, I think I can give you some color here. You know that in general, we decrease our inventory during the March quarter and the June quarter. That has been traditionally what we've done. This year, we reduced channel inventory for iPhone slightly more than last year and that is true in total and it's true for Greater China as well. So, we feel very good about our channel inventory ranges as we get into the September quarter. Hope that helps you with that.

Thank you, Wamsi. Could we have the next question, please?

Our next question comes from Jim Suva with Citigroup.

Thanks very much. The first question is probably to Tim and second one for Luca. I will ask them at the same time, so you can continue which other one you want to answer, first or second. While the first one is for Tim, regarding the installed base comment you've made, which is quite encouraging, but yet when you look at the iPhone revenue year-over-year the past several quarters have been down. Can you help us bridge the gap of, how is the installed base growing? Is it mostly because secondary users are the new ones coming into the system as people are holding more phones longer? And what does that user typically bring in with them or something unique relative to what we historically know? And then for Luca, you've been investing a lot, a lot, lot and a lot of these services are now coming to pass whether it be AppleCare, Apple Cloud, all these wearables and soon Apple Pay and Arcade. Are we at a point where now a lot of harvesting is going to happen or do you kind of continue this relatively same investment that you've been doing for the future strategy. Thank you.

Hey, Jim, it's Tim, I'll start with your installed base question. Installed base is a function of upgrades and the time between those. It's a function of the number of switchers coming into the to the iOS, macOS and so forth [indiscernible]. It's a function of the robustness of the secondary market, which we think overwhelmingly hits an incremental customer. And it's a function still in the emerging markets and somewhat developed markets to a lesser degree of people knew that they’re buying their first smartphone. There are still quite a few people in the world in that category. And so, the reason that the installed base doesn't correlate to the 90-day clock is that what's happening underneath the numbers is, switchers are still a very key piece of what's going on. The secondary market is very key, and we're doing programs et cetera to try to increase that, because we think we wind up hitting a cost number that we don't hit in another way. And the upgrades where people are holding onto their device a bit longer than they were, they're staying in the ecosystem. And then, you have the people in the new category as well. And so, that's sort of the equation. I don't want to go into the specific numbers, but I think you can see readily, mathematically, how the installed base is growing in an environment where the iPhone revenue is declining within a 90-day kind of window.

And Jim, on OpEx, obviously is very important for us to continue to invest in the business, particularly on the R&D side, because we will always want to bring more innovation into the market. We want to improve the user experience and differentiate our products and services in the marketplace. So, we will continue to do that. There are some types of investments, of course, that are very strategic for us and they will have long-term implications. You've seen the announcement that we made around the Intel acquisition. Very important strategically for us. It requires upfront investment, of course. As you've seen from this quarter and also from the past, we will continue to run our SG&A portion of OpEx tightly. Of course, we'll continue to invest in marketing and advertising. We talked about a lot of new services that we are launching during the fall and Apple Card next month, obviously they will require the appropriate level of marketing and advertising as we launch them to the general public. When you look in total, where we are in terms of our expense to revenue ratio for operating expenses, you know, quite well that we are extremely competitive relative to other tech companies. So, we want to continue to be competitive and at the same time we will not under-invest in the business.

Thank you, Jim. Could we have the next question, please?

The next question will come from Samik Chatterjee with JPMorgan.

Hi. Thanks for taking the question. I just wanted to start-off with the announcement at WWDC around the independent App Stores for the Watch and the iPad. What level of interest have you seen from developers and how are they thinking about the ability to monetize services independently on those App Stores? And how does that help you position wearables more firmly into the health and fitness category?

We're seeing good interest across virtually everything that we announced at WWDC. I couldn't be happier with it. The developer tools around ARKit and AR in general that I went through earlier, lots of interest there, lots of interest from the Watch App Store, to the Catalyst that will be released with macOS Catalina, which allows developers quickly to port a iOS app to the Mac. We think this is huge and so great for the user experience. And so, you look at all of these and all the things that I talked about earlier and I couldn't be happier with the reception that we're getting and the work that is going on behind the scenes right now for the developers readying their apps for the fall.

Got it. If I can just follow-up on the China market, one of the things that we're looking at is going into the New Year into 2020 there'll be a lot of 5G phones launching in that market from the Android players. How do you think about the competitive landscape there as you enter next year?

We don't comment on future products. With respect to 5G, I think most people would tell you, we're in sort of the extremely early innings of it. And even more so on a global basis. So, we couldn't be more proud of what our lineup is and we're excited about the great pipeline of both hardware and software and we wouldn't trade our position for anyone's.

Thank you, Samik. A replay of today's call will be available for two weeks on Apple Podcasts as webcast on apple.com/investor and via telephone. And the numbers of the telephone replay are 888-203-1112 or 719-457-0820, please enter confirmation code 3057347. These replays will be available by approximately 5 Pm Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. And financial analysts can contact Tejas Gala or me with additional questions. Tejas is at 669-227-2402, and I'm at 408-974-5420. Thanks again for joining us.

That does conclude our conference for today. Thank you for your participation.