What's in store for Apple's third-quarter earnings call? We transcribe CEO Tim Cook's answers to questions about the iPhone, China, and more.
Apple CEO Tim Cook and CFO Luca Maestri spoke with analysts during the company's Q3 2016 earnings call. Here's our ongoing live transcript of their remarks, courtesy Rene Ritchie and Mikah Sargent.
Cook's opening remarks
Tim Cook
Good afternoon and thank you for joining us. Today we're pleased to report that reflect stronger customer demand and business performance than we anticipated just 90 days ago and include several encouraging signs. Revenue of $42.4 billion was near the high end of our guidance range and gross margin of 38% was at the top of our guidance range. We achieved these results while reducing channel inventory by about $3.6 billion, significantly more than the the $2 billion reduction we'd expected.
So, our sell-through was markedly greater than our sell-in. iPhone accounted for the vast majority of the channel inventory reduction. iPhone unit sell-through was down just 8% year-on-year an even greater improvement over the March quarter than we predicted and we expect the September quarter sell-through comparison to improve further.
We feel good about our channel inventory levels and believe they position us well for the month ahead.
We had a very successful global launch of iPhone SE and demand outstripped supply throughout the quarter. We brought on additional capacity and we able to achieve supply/demand balance as we entered the September quarter.
At its launch we said the addition of the iPhone SE to the iPhone lineup placed us in a better position to meet the need of customers who love a 4-inch phone and to attract even more customers into our ecosystem. In both cases that strategy is working. Our initial sales data tells us the the iPhone SE is popular in both developed and emerging markets, and the percentage of iPhone SE sales going to customers who are new to iPhone is greater than we've seen in the first weeks of availability for other iPhones launched in the last several years.
Overall we added millions of first time smartphone buyers in the first quarter, and switchers accounted for the highest percentage of quarterly iPhone sales we've ever measured. In absolute terms, our year-to-date iPhone sales to switchers are the greatest we've seen in any 9 month period. And our active install base of iPhones is up strong double digits year-over-year.
We saw tremendous performance from our services businesses which grew 19% to a June quarter record of $6 billion. The growth was broad-based with App Store revenue up 37% to a new all-time high. In addition to strong increases in Music, iCloud, and Apple Care, in the last twelve months our services revenue is up almost $4 billion year-on-year to $23.1 billion and we expect it to be the size of a Fortune 100 company next year.
Most of our terrific services performance during the quarter was fueled by our active install base of devices, with install-based related purchases of $10.3 billion accelerating to 29% growth year-on-year.
We had our best iPad compare in 10 quarters, with revenue growing 7% thanks to the roll out of the 9.7-inch iPad Pro. We're proud to have the most exciting lineup of tablets and accessories in the world, and exceptionally high customer satisfaction and engagement.
Our surveys also show that about half of iPad Pro purchasers are buying them for work. iPad Pro is the ultimate upgrade for existing iPad users and the ultimate replacement device for customers switching from PC notebooks.
Apple Watch continues to be the best selling smartwatch in the world. And just this month, JD Power ranked it highest in customer satisfaction among all smart watches.
With watchOS 3 coming this fall, customers will be able to update their Apple Watches with an enhanced user interface, significantly improved performance, and all new fitness and health capabilities including activity sharing. We're just getting started with Apple Watch and we look forward to even more exciting announcements in this space.
On a personal note, during the past quarter I visited China and India and I am very encouraged about our growth prospects in those countries. We remain very optimistic about the long-term opportunities in greater China, and we continue to invest there.
We opened our 41st Greater China retail store during the quarter and we also made a $1 billion investment in Didi Chuxing.
Switchers and first time smartphone buyers represented the lion's share of our iPhone sales in the quarter and our install base of iPhones has ground by 34% over the last year alone.
According to China mobile, there are more iPhones on their network than any other brand, with iPhone users ranking first in terms of customer loyalty, data usage, and ARPU.
By far, the largest portion of our global channel inventory reduction was in Greater China, so our underlying business there is stronger than our results imply.
We faced some challenges in Greater China since the economic environment has slowed down since the beginning of the year. This is reflected in consumer confidence and retail spending. And the Chinese Ruan has depreciated by 7% relative to the US dollar since August of last year.
Hong Kong's tourism and retail businesses also continue to be significantly impacted by the stronger Hong Kong dollar relative to other Asian currencies.
Combining this backdrop to the tough comparison to last year when revenue grew 112%, and the channel inventory reduction this year, we're reporting a decline in revenue in the June quarter.
But to keep things in perspective, when we look back on our accomplishments in this segment over the last couple of years, they are truly remarkable. In the first three quarters of this fiscal year, our total revenue from Greater China was almost $40 billion, up 55% from the same time frame just two years ago, while iPhone units were up 47%.
India is now one of our fastest growing markets. In the first three quarters of this fiscal year, iPhone sales in Indian were up 51% year-on-year. We just announced a first-of-its-kind design and development accelerator to support Indian developers creating innovative applications for iOS, and we opened a new office in Hyderabad to accelerate Maps development.
We're looking forward to opening retail stores in India down the road and we see huge potential for that vibrant country.
As we look forward to the fall, we are thrilled by customers' response to the software and services we previewed at our World Wide Developers Conference last month. This was our biggest WWDC ever, and for the first time we have four innovative Apple platforms for our developers' apps: iOS, macOS, watchOS, and tvOS. In fact, iOS 10 will be the biggest release ever for iOS.
The momentum of all four platforms shows the strong relationship Apple enjoys with customers throughout their day and wherever they go. Whether it's at home, in their car, at work or everywhere in between, the Apple ecosystem is thriving and growing and our new OS releases this fall will take these great experiences to a new level.
Customers can look forward to more expressive ways to communicate with Messages. Now with its own App Store, allowing users to create and share content, make payments, add stickers, and more, all without leaving Messages, which is now one of the largest messaging services in the world.
Customers can also look forward to a broader and more intelligent role for Siri, which will work with your favorite apps from the App Store, so you can ask Siri to book a ride with your favorite ride-sharing app, or send money to someone with Square.
There's also beautifully redesigned apps for Music, Maps, and News, significant enhancements to HomeKit, CarPlay, and the Health app, building on our strategy to give users a seamless experience in all aspects of their lives.
There's also a major update with macOS Sierra, with new features like Siri and Apple Pay that make the Mac smarter and more helpful than ever, and even stronger Continuity features across all Apple devices.
These experiences become more powerful and intuitive as we continue our long history of enriching our products through advanced artificial intelligence. We have focused our AI efforts on the features that best enhance the customer experience.
For example, machine learning enables Siri to understand words as well as the intent behind them. That means Siri does a better job understanding and even predicting what you want then delivering the right responses to requests. To make Siri an even smarter assistant, we're opening the service to developers. And this fall, Siri will be available across our entire product line.
We're also using machine learning in many other ways across our products and services, including recommending songs, apps, and news. Machine learning is improving facial and image recognition in Photos, predicting word choice while typing in Messages and Mail, and providing context-awareness in Maps for better directions.
Deep learning within our products even enables them to recognize usage patterns and improve their own battery lives.
And most importantly, we deliver these intelligent services while protecting users' privacy. Most of the AI processing takes place on the device rather than being sent to the cloud.
And starting this fall, we'll be using sophisticated technology called "differential privacy", enhancing our ability to deliver the kinds of services we dream of and our customers love without compromising on the individual privacy our customers have come to expect from us.
This fall we'll also bring Apple Pay to Safari, so users can easily make secure and private purchases when shopping on participating websites. Tens of millions of users around the world are enjoying Apple Pay today in stores and in apps, with estimated monthly active users up more than 450% year-on-year last month.
Leading financial partners tell us that 3 out 4 contactless payments in the US are made with Apple Pay. This is amazing!
There are more than 11 million contactless-ready locations in the countries where Apple Pay is available today, including 3 million locations now accepting Apple Pay in the United States.
With the launch of France, Switzerland, and Hong Kong this month, Apple Pay is live in 9 markets, including 6 of our top 10. Adoption outside the US has been explosive, with over half of transaction volume now coming from non-US markets.
With our latest OS releases the unparalleled continuity will become even more powerful. For example, macOS Sierra will sense other devices and use secure protocols to communicate. With an authenticated Apple Watch, I can auto-unlock my Mac when I open it without typing a password.
With Universal Clipboard, I can copy and paste text, images, and even video between my iOS devices and my Mac, and I can automatically access my files from the Desktop and Documents folder from another Mac, iOS device, or even a PC.
Innovations like these are the kinds of things only Apple can do. We have an incredible lineup of products in our lineup and I'm very bullish about our long term opportunity.
Now, I'd like to hand it over to Luca to share more details with you on the June quarter.
Luca Maestri
Thank you, Tim, good afternoon everyone. Revenue for the June quarter was $42.4 billion, near the high end of our guidance range, compared to $49.6 billion in the year-ago quarter. Customer demand for our products and services was stronger than we had anticipated at the beginning of the quarter. As Tim mentioned, we reduced overall channel inventories by roughly 3.6 billion.
On a geographic basis, our revenue grew strongly in Japan, to a new June quarter record, and we experienced healthy growth in a number of other important markets, including Russia, Brazil, Turkey, India, and Canada.
Gross margin was 38%, at the top of our guidance range. Operating margin was 23.9% of revenue and net income was $7.8 billion. Diluted earnings per share were $1.42, and cash flow from operations was strong at 10.6 billion.
For details by product, I will start with the iPhone. We sold 40.4 million iPhones in the quarter. We also reduced channel inventory by over 4 million units, compared to about a half-a-million units a year ago. So, sell-through was down by 8%. We exited the quarter near the low-end of our 5-7 week target range for channel inventory.
The rollout of our new, entry-level iPhone SE, concurrent with the channel reduction of more than 4 million higher end iPhones resulted in a lower than usual iPhone ASP of $595. Therefore, we expect iPhone ASPs to improve this quarter.
We experienced strong iPhone growth in many markets, with sales in Russia more than doubling year-over-year, and double-digit growth in many other key countries including Japan, Turkey, Brazil, India, Canada, and Sweden.
iPhone continues to show great momentum in business markets. A recent survey by 451 Research found that among US corporate buyers planning to purchase smartphones in the September quarter, 75% planned to purchase iPhones. This is the highest corporate purchase intent ever measured by the survey for the September quarter.
Turning to services we generated $6 billion in revenue, an increase of 19% over the June quarter last year. We set a new record for customers transacting on our iTunes stores, and among our customers who purchased apps and content, the average amount spent per customer was the highest we've ever measured.
The App Store's growth rate has now accelerated for four consecutive quarters, reaching 37% in Q3. The App Store is overwhelmingly the preferred destination for both customers and developers. According to App Annie, it generated 100% more global revenue than Google Play in the June quarter, widening our lead from the March quarter.
Because of this continued growth, for the first nine months of our fiscal year, services have increased from 8% of our total revenue from a year ago to 11% this year, and it represents an even higher percentage of our profitability.
Next, I'd like to talk about the Mac. We sold 4.3 million Macs compared to 4.8 million last year. It was a challenging quarter for personal computer sales across the industry, with IDC estimating a 4% global contraction. In addition to the overall market slowdown, we faced a very difficult compare to the year-ago quarter, when we introduced a new MacBook Pro and a new iMac.
Despite these challenges, Mac continues to gain a high percentage of new customers and our Mac install base has grown to a new all-time high at the end of June quarter.
We ended the quarter below our 4-5 week target range for Mac channel inventory.
Now, turning to iPad, revenue grew 7%. iPad ASP was $490 compared to $415 in the year-ago quarter, with increase driven by iPad Pro. And we sold 10 million iPads, compared to 10.9 million in the year-ago quarter. We also reduced channel inventory by about 500K units, and exited the quarter within our 5-7 week target range.
In the segments in the tablet markets where we compete, we continue to be highly successful both in terms of market share and customer metrics. Recent data from MPD indicates that iPad gained share in the overall US tablet market in the June quarter and has 84% share of tablets priced about $200. And in May, 451 Research mentioned a 96% consumer satisfaction rate for iPad mini, and a 95% rate for iPad Air.
Among US consumers planning to purchase a tablet within the next 6 months, 63% plan to purchase an iPad, almost four times the purchase intention rate the next-highest brand measured, with iPad Pro the top choice for planned purchases.
Corporate buyers reported a 94% satisfaction rate for iPad, and a purchase intent of 71% for the September quarter.
One recent example of iPad business adoption is Sberbank, Russia's largest bank, which is adding 22K iPads to more than 10K purchased last year to deploy corporate mobility solutions across the organization and enable its consultants to serve customers in a more engaging and more efficient way.
More broadly, we're making great progress with our enterprise initiatives and we see strong growth opportunities ahead of us. In May we announced a global strategic partnership with SAP to re-imagine business processes with native iOS apps.
SAP is the world's largest enterprise software provider with more than 130 million potential users among its 300K global customers. In fact, it's estimated that 76% of global business transactions touch an SAP system.
Our partnership will deliver an SDK to fast-track iOS projects for SAP environments, an iOS academy, to enable the 2.5 million SAP developers around the world to build great native iOS apps, and a portfolio of industry specific apps to accelerate mobile transformation in the enterprise.
Last month we announced the first three solutions from our Cisco partnership. Two that we will dramatically improve the network improvements running through Cisco networks, and one that will bring the desk phone to the 21st century by integrating iPhone Wi-Fi calling to the Cisco Spark.
We'll update this transcript as the call progresses, so stay tuned!