Apple Q3 FY 22 investor meeting transcript

Apple announced its thirteenth consecutive record-breaking quarter July 28, 2022. Coming at a time of very challenging macroeconomic circumstances, the company managed to slightly exceed estimates. What follows is a (quite rough) transcript of the analyst call that followed the announcement.

Apple CEO Tim Cook

Today. Apple is reporting another record June quarter with revenue of $83 billion, which was better than we expected, despite supply constraints, strong foreign exchange headwinds and the impact of our business in Russia.

We set June quarter records in the Americas in Europe and in the rest of Asia Pacific region. We also saw June quarter revenue records in both developed and emerging markets with very strong double digit growth in Brazil. Indonesia and Vietnam, and a near doubling of revenue in India. We saw great enthusiasm for our products and services, resulting in an all-time record for our installed base of active devices.

Our supply constraints were less than we anticipated at the beginning of the quarter, coming in slightly below the range we discussed during our last call.

on challenge

We know that this is a time of significant challenge around the world for all of us confronting new variants of COVID-19 to those experiencing a prolonged humanitarian crisis in Ukraine and everyone dealing with the consequences of an uncertain economic environment. We know that much of the world is living through uneasy times.

And it is all the more reason why we are working hard to help our customers navigate the world as it is, while empowering them to create the world as it can be.

on iPhone, Mac and iPad

Turning to iPhone. We set a June quarter record for both revenue and switchers to iPhone.

With its advanced performance, capability and ease of use, customers continue to find that iPhone remains the gold standard for smartphones. And they’ve been raving about the iPhone 13 line-up’s extraordinary camera quality with features like cinematic mode and macro photography to create eye catching content.

We were also proud to celebrate the 15th anniversary of iPhone, a device that continues to change the world in profound ways with each new innovation. Last month, Apple unleashed a wave of innovation, including the completely redesigned MacBook Air and a new 13 inch MacBook Pro. Both these systems are powered by into our next generation of Apple silicon for Mac. M2 delivers a faster CPU, GPU and neural engine along with higher memory bandwidth and new capabilities like Pro Res acceleration. And it continues the tremendous pace of innovation of Apple silicon for the Mac. We continue to have supply constraints with Mac, but we’re encouraged by the strong response from customers to our incredible line-up.

iPad like Mac continue to see strong demand during the June quarter despite ongoing supply constraints. Customers and developers have been especially excited about the new features we’re bringing to iPad with iPad OS 16.

On WWDC

This update was one of the many announcements we made at a truly extraordinary WWDC where we shared a range of new features that give customers more control of their experience than ever before. This includes the ability to edit or delete sent messages, a new way of organising apps on iPad and Mac and an all new customizable lock screen on iPhone and so much more.

[Also read: Will Apple and Jamf earnings show growth in Mac enterprise?]

Today, iOS 16, iPad OS 16, Mac OS Ventura, and Watch OS 9 are all in public beta. And we couldn’t be more excited to see what our community of developers creates. We unveiled new innovations in accessibility such as door detection and live captions that support users with disabilities with navigation, health, communication and more.

We also announced Apple Pay Later, which gives customers more flexibility to make purchases with their Apple devices. And with our next generation of CarPlay we’re improving the driving experience with deeper integration into vehicle hardware, allowing drivers to control their music, change the temperature and monitor their fuel levels all from a single integrated platform.

On wearables

In the wearables home and accessories category, the innovation infused across our products continues to win over new customers. Apple Watch remains a great way for health conscious customers to track their overall wellness and fitness and we’re bringing them even more data about their workouts, sleep cycles and medications with updates soon to arrive on watch OS 9. We were also pleased to get FDA approval for a new feature that will let users with irregular heart rhythms track the time they spend in afib.

On services

Turning to services, customers continue to engage enthusiastically with our content across news, fitness, music, gaming and more. Services revenue rose to $19.6 billion, a June quarter record and a 12% increase year over year, which was in line with our expectations.

[Also read: Apple’s services pivot unlocks $1 trillion opportunity

We’re proud of how Apple TV+ productions like Severance and Blackbird have captured the popular imagination and we’re looking forward to more exceptional content developed by extraordinary creators throughout the year. In two and a half years since launch, Apple TV+ has now earned 250 wins and over 1,100 Award nominations and counting. Just this month, we learned that Apple TV plus earned 52 Emmy Award nominations across 13 titles. At our last call. I mentioned Friday Night Baseball on TV+ which is already delighting baseball fans.

And last month we announced a 10 year deal to present major league soccer matches around the world, giving global soccer fans a whole new way of viewing their favourite sport.

One of the best parts of WWDC was welcoming developers to Apple Park while continuing to connect with developers all over the world. This year, we had an incredible group of developers and more opportunities to learn from one another than ever before. It was a truly special experience and a reminder of the economic miracle the App Store represents.

We are proud of the fact that the iOS app economy supports more than 2.2 million jobs here in the United States, and many more around the world. It’s been wonderful to see earnings by small developers more than double over the past two years. And as we’re supporting developers, we’re also doing our part to protect customers. In 2021 we prevented nearly $1.5 billion in fraudulent transactions by stopping over 1.6 million risky and vulnerable apps and app updates.

On retail

Now I want to turn to retail. This quarter we opened the doors to Apple’s first store in the Hubei province in China welcoming the community to buy beautiful new space. And earlier today we opened Apple Brompton Road, our fifth store in central London. We also expanded Today at Apple Creative Studios to reach even more young creatives from underrepresented communities to help them realise their potential and bring their best ideas to life. I’d like to take this opportunity to express my appreciation to our team members working in Apple Stores, customer care centres and channel partner stores and to our Apple Care teams for their incredible work supporting customers wherever they are. creating innovative products and services that enrich people’s lives is our mission.

Leading with our values in everything we do gives that mission purpose that includes a commitment to the environment where we continue our aggressive pursuit of our 2030 goals. It includes our focus on diversity and inclusion where we are committed as ever to making progress and it includes our work to promote racial equity and justice. We recently announced that the Global Equity Innovation hub in partnership with Cal State Northridge will provide new community grants to Hispanic serving institutions to help the next generation of creators and innovators build skills and pursue high demand careers in STEM.

We also celebrated the graduation of the inaugural class of our developer Academy in Detroit from a programme designed to give students the skills they need to pursue jobs and a thriving iOS app economy leading with our values also means leading with a steadfast commitment to privacy and security.

Last month, we announced the introduction of Pass Key, a next generation credential that’s intended to replace passwords. A PassKey can’t be phished, nor can it be stolen by hackers in a data breach because the information is stored on your device and your device alone.

And as part of our effort to combat targeted attacks against the highest risk targets, like journalists and human rights activists, we introduced Lockdown Mode, which is designed to protect those most at risk of sophisticated digital attacks.

And we’re committed to doing our part to address the housing crisis across California. Today, we have deployed more than $1.3 billion to a number of initiatives, including ones that provide financial assistance to low and moderate income first time homebuyers, develop new affordable housing and help support vulnerable populations.

This quarter has ultimately been a reflection of our resilience and our optimism. As we look forward, we’re clear eyed about the uncertainty in the macro environment. Yet we remain ever focused on the same vision that has guided us from the beginning. We strive every day to be a place where imagination ignites innovation like nowhere else, where good people come together to achieve great things. Our customers are the centre of everything we do. And we will continue to execute on that vision, as we always have led by a focus on excellence and a desire to leave the world better than we found it. And with that, I’ll turn it over to Luca.

What CFO Luca Maestri said

Thank you, Tim. And good afternoon, everyone. We’re very pleased to report June quarter financial results that continue to demonstrate our ability to innovate across hardware, software and services while operating our business effectively during very challenging economic circumstances.

We set a June quarter revenue record of $83 billion up 2% year over year, despite supply constraints, over 300 basis points of foreign exchange headwinds and the impact on our business in Russia around the world.

We set new June quarter records in the Americas in Europe and rest of Asia Pacific.

on product sales

On the product side revenue was $63.4 billion with the June quarter revenue record for iPhone. During the quarter, our installed base of active devices continued to grow well thanks to our unmatched levels of customer satisfaction and loyalty, (which) reached an all time high for all major product categories and geographic segments.

Our services set a June quarter revenue record of $19 6 billion up 12% over a year ago, with all time revenue records in the Americas and the rest of Asia Pacific and June quarter records in Europe and Greater China. We also achieve June quarter revenue records in each major services category, including all time revenue records for music cloud services, Apple Care, and payment services.

Company gross margin was 43.3%, down 40 basis points from last quarter as seasonal loss of leverage and unfavourable foreign exchange were partially offset by favourable mix.

Products gross margin was 34.5% down 190 basis points sequentially. Services margin was 71.5% down 110 basis points sequentially, due to a different mix and foreign exchange. Net income was $19.4 billion and diluted earnings per share were $1.20 while operating cash flow of $22.9 billion was a June quarter record.

On product mix

Let me now get into more detail for each of our revenue categories. iPhone revenue grew 3% year over year to June quarter record of $40.7 billion despite foreign exchange headwinds as customer response to our iPhone 13 family continue to be strong. We saw new quarter records in both developed and emerging markets and the iPhone active installed base. reach a new all-time high across all geographies as a result of this level of sales performance combined with unmatched customer loyalty.

In fact, the latest survey of US consumers from 451 research indicates iPhone customer satisfaction of 98%.

We also attracted a record number of switchers for the June quarter with strong double digit year over year growth.

For Mac, we generated a revenue of $7.4 billion despite supply constraints and negative effects. We continue to be excited about our long term opportunity with Mac and redefining the PC experience with our relentless innovation. Our investment focus on Mac has helped drive significant growth in our installed base, which reached an all time high during the June quarter as nearly half of the customers purchasing a Mac were new to the product.

iPad revenue was $7.2 billion down 2% year over year due to supply constraints and negative foreign exchange. Customer response to our iPad continues to be strong across consumer education and enterprise markets around the world. The iPad installed base reached a new all-time high with over half of the customers during the quarter being new to the product.

Wearables home and accessories revenue was 8.1 billion down 8% year over year as we faced foreign exchange headwinds, different launch timing for home and accessories, products, and supply constraints as well as the overall macro-economic environment.

Despite this, our installed base of devices in the category hit a new all-time record. For example, Apple Watch continues to extend its reach with over two thirds of customers purchasing an Apple watch during the quarter being new to the product.

On services

Services had a June quarter revenue record of $19.6 billion up 12%. We said June quarter revenue records in both developed and emerging markets and set all-time records in many countries around the world, including the US, Mexico, Brazil, Korea and India.

The record level of performance of our services portfolio during the June quarter reflects the strength of our ecosystem on many fronts. First, our instal base has continued to grow, reaching an all-time high across each geographic segment and major product category. We also saw increased customer engagement with our services. During the quarter our transacting accounts, paid accounts and accounts with paid subscriptions all grew double digits year over year and Paid Subscriptions showed very strong growth. We now have more than 860 million paid subscriptions across the services on our platform, which is up more than 160 million during the last 12 months alone.

And finally we continue to improve the breadth and the quality of our current services offerings from a constant flow of new content on Apple TV plus and Apple Arcade.

On the enterprise 

In the enterprise market our customers are increasingly investing in Apple products. As a strategy to attract and retain talent. Bank of America is providing iPhones to all of its financial advisors, so they can instantly access client information and provide timely wealth management advice from anywhere. Wipro, another large, global enterprise customer is investing in MacBook Air with M1 as a competitive advantage when recruiting new graduates globally, thanks with superior performance and lower total cost of ownership. And with the new M2 chip powering MacBook Air and the 13 inch MacBook Pro, we expect more customers to make Mac available to their entire workforce.

On cash and moving forward

Let me now turn to our cash position. We ended the quarter with $179 billion in cash and marketable securities. we repaid $3 billion in maturing debt while increasing commercial paper by $4 billion, leaving us with total debt of $120 billion. As a result, net cash was nearly $60 billion at the end of the quarter. We returned over $28 billion to shareholders during the June quarter. This included $3.8 billion in dividends and equivalents and $21.7 billion through open market repurchases of 143 million Apple shares.

We continue to believe there is great value in our stock and maintain our target of reaching a net cash neutral position over time.

As we move ahead into the September quarter, I like to review our outlook, which includes the types of forward looking information that pages refer to at the beginning of the call. Given the continued uncertainty around the world in the near term, we’re not providing revenue guidance, but we are sharing some directional insights based on the assumption that the macroeconomic outlook and COVID related impacts to our business do not worsen from what we are projecting today for the current quarter.

Overall, we believe our year over year revenue growth will accelerate during the September quarter compared to the June quarter despite approximately 600 basis points of negative year over year impact for foreign exchange.

On the product side, we expect supply constraints to be lower than what we experienced during the June quarter. Specifically related to services, we expect revenue growth to decelerate from the June quarter due to macroeconomic factors and foreign exchange. We expect gross margin to be between 41.5 and 42.5%. We expect OPEX to be between 12.9 and $13.1 billion.

**Questions with analysts followed.

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