Apple Inc., Q4 2017 Earnings Call, Nov 02, 2017 - NasdaqGS:AAPL

NasdaqGS:AAPL

Nancy Paxton, the Former Senior Director of Investor Relations & Treasury at Apple Inc., made the following statements during the Q4 2017 Earnings Call:

1. Opening Remarks:

   • Thanked everyone for joining the call.
   • Introduced the call's format, noting that Apple's CEO, Tim Cook, would speak first, followed by CFO Luca Maestri.
   • Announced that the call would be opened to questions from analysts after the presentations.

2. Forward-Looking Statements Disclaimer:

   • Noted that some information provided during the call would consist of forward-looking statements, including those regarding revenue, gross margin, operating expenses, other income and expense, taxes, and future business outlook.
   • Emphasized that actual results or trends could differ materially from forecasts.
   • Directed listeners to 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 for more information.
   • Stated that Apple assumes no obligation to update any forward-looking statement or information, which speaks as of their respective dates.

3. Introduction of Tim Cook:

   • Turned the call over to Tim Cook for introductory remarks.

4. Closing Remarks:

   • Provided information on how to access the replay of the call, including the availability on Apple’s website and via telephone.
   • Gave the contact details for press and financial analysts with additional questions.
   • Thanked everyone for joining the call.

These are the key points covered by Nancy Paxton during the earnings call.

Here’s a detailed summary of Timothy D. Cook’s comments during the Apple Inc. Q4 2017 Earnings Call:

Opening Remarks

• Cook expressed excitement about Apple's future.
• 2017 was Apple's biggest year ever in most parts of the world, with record revenue in various regions.
• Generated highest September quarter revenue ever with 12% year-over-year growth.
• Returned to growth in Greater China with unit growth and market share gains for iPhone, iPad, and Mac.
• Record quarter for Mac sales in mainland China and all-time high for Services revenue.
• Revenue from emerging markets outside of Greater China was up 40% with strong momentum in India.
• Double-digit growth in worldwide customer purchases of iPad and Mac in enterprise and education markets.

iPhone

• Sales exceeded expectations, with iPhone 8 and iPhone 8 Plus becoming the two most popular models since launch.
• iPhone X launched with innovative technologies like the TrueDepth camera system, Super Retina display, and A11 Bionic chip.
• Strong orders for iPhone X; working to get it into customers' hands as quickly as possible.

Services

• All-time quarterly record revenue of $8.5 billion, with a goal of doubling fiscal 2016 Services revenue by 2020.
• Services business reached $30 billion in fiscal 2017, the size of a Fortune 100 company.
• Second consecutive quarter of double-digit unit growth for iPad, with strong customer response to new lineup and iOS 11 features.

Augmented Reality (AR)

• Believes AR will change the way we use technology forever, transforming work, play, connection, and learning.
• Over 1,000 apps with powerful AR features in the App Store, with developers creating new experiences.
• AR is the world's largest platform for augmented reality, enabling totally new experiences.

Mac

• Best year ever for Mac, with highest annual Mac revenue in Apple's history.
• Best September quarter ever with 25% revenue growth driven by notebook refreshes and strong back-to-school season.
• Mac experience improved with the launch of macOS High Sierra.

Apple Watch

• Continued to be the best-selling and most-loved smartwatch with over 50% unit growth for the third consecutive quarter.
• Apple Watch Series 3 offers new freedom of cellular, allowing users to stay connected without their phones.
• Apple Heart Study uses data from Apple Watch to identify irregular heart rhythms.

Wearables Business

• Up 75% year-over-year in the fourth quarter, generating the annual revenue of a Fortune 400 company.

Apple TV 4K

• Delivers a cinematic experience at home with 4K HDR quality and streaming of live sports and news.

Apple Michigan Avenue Store

• Represents the future of Apple retail, providing a welcoming place for everyone to experience products and services.
• Partnerships with local nonprofits and creative organizations to make a positive impact in the community.

App Development Curriculum

• Expanded free app development with Swift curriculum to over 30 community colleges.
• Initiative provides opportunity for millions of students to build apps and prepare for careers in software development.

Outlook

• Expects the upcoming holiday season to be the biggest quarter ever.
• Thanks all teams, partners, and customers for making 2017 a sensational year.

Questions and Answers

• On iPhone X Demand and Supply: Cook noted that the ramp for iPhone X is going well despite its advanced technologies. He couldn’t predict when supply would meet demand but stated that the company is increasing production weekly.

• On China Growth: Cook highlighted strong double-digit growth in China, driven by increased market share for iPhone, Mac, and iPad. He mentioned strong revenue growth in services and Mac, as well as double-digit unit growth in iPhone. He also noted that the decline in Hong Kong has moderated.

• On iPhone Lineup and Guidance: Cook mentioned that the ASP (average selling price) in Q4 reflected good success across different iPhones. He emphasized that Apple has never had three new iPhones at once and that the guidance reflects the company’s best thinking.

• On Price Elasticity: Cook explained that many people pay for the phone monthly, reducing the upfront cost. He also mentioned trade-in values and promotional offers, suggesting that the price of iPhone X is affordable when considered in context.

• On Innovation and Market Position: Cook stated that Apple has always been in a competitive position and that AR is profound, with Apple in a unique position to lead in this area.

• On India: Cook discussed the factors necessary for success in India, including building stores, channels, markets, and the developer ecosystem. He noted that Apple is making progress and gaining understanding of the market.

• On AR Monetization: Cook emphasized focusing on the customer experience first and foremost, believing that revenues and profits will follow if the experience is right.

Luca Maestri, the CFO and Senior Vice President of Apple Inc., provided the following details during the Q4 2017 Earnings Call:

1. Financial Overview:

   • Revenue for the September quarter was a record $52.6 billion, up 12% over the previous year.
   • Growth rate accelerated in every quarter of fiscal 2017.
   • Revenue growth was observed in all product categories for the second quarter in a row.
   • New September quarter revenue records were set in the Americas, Europe, and the Rest of Asia Pacific segments.
   • Double-digit growth was reported in the U.S., Canada, Germany, France, Italy, Spain, Korea, and several other developed markets.
   • Revenue growth of 12% was noted in Greater China, and revenue doubled year-over-year in India.

2. Gross Margin:

   • Gross margin was 37.9%, at the high end of the guidance range.
   • Operating margin was 25% of revenue.
   • Net income was $10.7 billion.
   • Diluted earnings per share were $2.07, up 24% over the previous year, setting a new September quarter record.
   • Cash flow from operations was $15.7 billion.

3. iPhone Performance:

   • During the quarter, 46.7 million iPhones were sold, up 3% over the previous year.
   • Double-digit iPhone growth was observed in many emerging markets, including mainland China, the Middle East, Central and Eastern Europe, India, and Mexico.
   • Apple gained market share in Canada, Germany, France, Italy, Spain, Sweden, and Singapore.
   • iPhone channel inventory increased by 1.3 million units sequentially to support the launch of iPhone 8 and 8 Plus, which was significantly less than the increase in the September quarter a year ago.

4. Customer Satisfaction and Intentions:

   • The latest data from 451 Research on consumers indicated a customer satisfaction rating of 97% or higher across all iPhone models.
   • Among consumers planning to buy a smartphone in the next 90 days, purchase intention for iPhone was 69%, more than five times the rate of the closest competitor.
   • Current iPhone owners had a loyalty rate of 95% compared to 53% for the next highest brand.
   • For corporate smartphone buyers, iOS customer satisfaction was 95%.

5. Services Business:

   • An all-time quarterly record of $8.5 billion in revenue was set, up 34% year-over-year.
   • A favorable one-time revenue adjustment of $640 million was included in the results.
   • On a run-rate basis, excluding the adjustment, services growth of 24% was the highest experienced that year.
   • The App Store set a new all-time record, generating nearly twice the revenue of Google Play.
   • Apple Music saw strong revenue growth and the number of paid subscribers increased over 75% year-over-year.
   • The iCloud business experienced very strong double-digit growth in both monthly average users and revenue.
   • The number of paid subscriptions reached over 210 million at the end of the September quarter, an increase of 25 million in the last 90 days.

6. Apple Pay Expansion:

   • Apple Pay expanded to Denmark, Finland, Sweden, and the UAE last month.
   • Active users have more than doubled, and annual transactions are up 330%.
   • In the U.S., 70% of leading grocery chains now accept Apple Pay, and over 5 million U.S. merchant locations will be Apple Pay enabled by the end of the year.

7. Mac Performance:

   • For fiscal 2017, a new all-time revenue record of $25.8 billion was set for the Mac.
   • 5.4 million Macs were sold during the September quarter, up 10% over the previous year.
   • Mac revenue grew 25% to a new September quarter record.
   • Each of Apple’s geographic segments grew Mac revenue by 20% or more.
   • Customer purchases of Mac in the education market grew double digits year-over-year.

8. iPad Performance:

   • 10.3 million units were sold, up 11% over the previous year, with strong demand for both iPad and iPad Pro.
   • Revenue grew 14%.
   • Unit and revenue growth were observed in all geographic segments, with particularly strong results in emerging markets, including Greater China and India.

9. Enterprise Initiatives:

   • A new partnership with Accenture was announced, creating a dedicated iOS practice in select locations worldwide.
   • A partnership with GE was announced to bring GE's industrial IoT platform to iOS.

10. Retail and Online Stores:

    • Retail and online stores welcomed 418 million visitors.
    • Traffic was particularly heavy during the week of new product announcements, up 19% over the previous year.
    • Retail ran a very successful back-to-school promotion in the Americas, Europe, China, and Singapore, with sales for Mac and iPad Pro up strong double digits compared to the previous year’s program.
    • Over 200,000 Today at Apple sessions were conducted worldwide during the quarter.

11. Cash Position:

    • Ended the quarter with $268.9 billion in cash plus marketable securities, a sequential increase of $7.4 billion.
    • $252.3 billion of this cash, 94% of the total, was outside the United States.
    • Issued $7 billion in new Canadian and U.S. dollar-denominated debt during the quarter.
    • Returned $11 billion to investors during the quarter, including $3.3 billion in dividends and equivalents and $4.5 billion on repurchases of 29.1 million Apple shares through open-market transactions.
    • Launched a new $3 billion ASR program, resulting in initial delivery and retirement of 15.1 million shares.
    • Completed almost $234 billion of the $300 billion capital return program, including $166 billion in share repurchases.

12. Outlook for December Quarter:

    • Revenue is expected to be between $84 billion and $87 billion.
    • Gross margin is expected to be between 38% and 38.5%.
    • Operating expenses are expected to be between $7.65 billion and $7.75 billion.
    • Other income and expense is expected to be about $600 million.
    • The tax rate is expected to be about 25.5%.

13. Board of Directors:

    • Declared a cash dividend of $0.63 per share of common stock payable on November 16, 2017, to shareholders of record as of November 13, 2017.