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    AAPL
    Earnings call· Dec 2019(Q1 FY20)

    Apple Q1 FY20 earnings call AAPL

    Jan 28, 2020 Source

    Executive summary

    Apple Q1 FY20 — Record Revenue and Earnings Driven by iPhone 11 and Services Growth

    Apple delivered its largest quarter ever, setting new all-time records for revenue and earnings, significantly exceeding guidance. This performance was fueled by robust demand for the new iPhone 11 lineup and continued double-digit growth in Services and Wearables. The company's active installed base reached a new high, driving ecosystem engagement, though the forward outlook is tempered by uncertainty related to the emerging public health situation in China.

    Highlights

    5

    • Record revenue of $91.8 billion, up 9% YoY, exceeding guidance

    • iPhone revenue up 8% YoY to $56 billion, driven by strong demand for iPhone 11 models

    • Services revenue reached an all-time record of $12.7 billion, growing 17% YoY

    • Wearables, Home and Accessories revenue hit a new all-time record of $10 billion, up 37% YoY

    • Active installed base of devices surpassed 1.5 billion, up over 100 million in 12 months

    Concerns

    4

    • Wider-than-usual revenue guidance range for Q2 FY20 ($63B-$67B) due to coronavirus uncertainty

    • Supply constraints for Apple Watch Series 3 and AirPods Pro impacting availability

    • Japan revenue down 10% YoY due to iPhone performance challenges from regulatory changes

    • Mac and iPad revenue had difficult year-over-year comparisons due to prior-year launches

    Guidance & targets

    7
    CategoryTargetConfidence
    Revenue
    $63 billion and $67 billion
    high materiality
    Medium
    Gross margin
    38% and 39%
    high materiality
    High
    Operating expenses (OpEx)
    $9.6 billion and $9.7 billion
    medium materiality
    High
    Other income and expenses (OI&E)
    about $250 million
    low materiality
    High
    Tax rate
    about 16.5%
    low materiality
    High
    Paid subscriptions target
    600 million
    high materiality
    High
    Apple Watch Series 3 supply balance
    balance during this quarter
    low materiality
    Medium

    Segment performance

    8
    SegmentRevenueYoYQoQMargin
    Greater China
    Returned to growth with strong performance across iPhone, Services, and Wearables. iPhone 11 was particularly well-received. Attracting a large percentage of new customers for Mac and iPad.
    iPhone growth: double-digitServices growth: double-digitWearables growth: extremely strong double-digitMac new customers: 75%iPad new customers: nearly 2/3
    		—returned to growth——
    Japan
    Revenue was down 10% primarily due to iPhone performance, impacted by regulatory changes. Services and Wearables showed very strong double-digit growth.
    iPhone performance: challengedServices growth: very strong double-digitWearables growth: very strong double-digitTop selling smartphones: 6 of top 7 were iPhones
    		—down 10%——
    Products
    Revenue up 8% with iPhone returning to growth and strong results in Wearables. Gross margin up 260 basis points sequentially due to leverage and favorable mix.
    		$79.1 billion8%—34.2%
    Services
    Set a new all-time revenue record with double-digit growth across all geographic segments and new records in multiple categories. Gross margin up 30 basis points sequentially driven by favorable mix.
    Geographic growth: double-digit in every segmentApple Music: all-time revenue recordCloud services: all-time revenue recordPayment services: all-time revenue recordApp Store search ad business: all-time revenue recordApp Store: December quarter recordAppleCare: December quarter record
    		$12.7 billion17%—64.4%
    iPhone
    Revenue grew 8% year-over-year due to exceptional demand for the iPhone 11 lineup. Set all-time revenue records in several countries including the U.S., Mexico, U.K., France, Spain, Poland, Thailand, Malaysia, and Vietnam.
    iPhone 11: top-selling model every weekNew models: 3 most popular iPhonesDeveloped markets growth: double-digit in U.S., U.K., France, SingaporeEmerging markets growth: double-digit in Brazil, Mainland China, India, Thailand, TurkeyCustomer satisfaction (U.S.): 98% for iPhone 11, 11 Pro, 11 Pro MaxBusiness buyers planning purchase (U.S.): 84% plan to purchase iPhones
    		$56 billion8%——
    Mac
    Revenue was $7.2 billion. Had a difficult year-over-year comparison due to prior-year launches. Demand was around even to last year. Active installed base reached a new all-time high.
    New customers: around half of purchasers were new to Mac
    		$7.2 billion———
    iPad
    Revenue was $6 billion. Had a difficult year-over-year comparison due to prior-year launches. Demand was around even to last year. Active installed base reached a new all-time high.
    Growth in emerging markets: Mexico, India, Turkey, Poland, Thailand, Malaysia, Philippines, VietnamNew customers: around half of purchasers were new to iPadCustomer satisfaction (consumers): 93%Customer satisfaction (businesses): 92%Buyers planning purchase (March quarter): 78% plan to purchase iPads
    		$6 billion———
    Wearables, Home and Accessories
    Established a new all-time record with revenue up 37% year-over-year, driven by strong double-digit performance across all geographic segments and growth across all sub-categories. Experienced product shortages due to strong demand for Apple Watch and AirPods.
    Wearables growth: 44%Geographic performance: very strong double-digit across all 5 segmentsApple Watch new customers: over 75% of purchasers were new to Apple Watch
    		$10 billion37%——

    Operational metrics

    32
    Revenue
    $91.8 billion9% from a year ago
    Q1 FY20

    Set new all-time record, above high end of guidance range, despite $1 billion foreign exchange headwind.

    Company gross margin
    38.4%up 40 basis points sequentially
    Q1 FY20

    Driven by leverage from higher revenue, despite negative foreign exchange impact.

    Reported tax rate
    14.2%
    Q1 FY20

    Before discrete items, the rate was 16.5%, in line with guidance. A favorable onetime item impacted the rate by 230 basis points.

    Net income
    $22.2 billionup $2.3 billion or 11% over last year
    Q1 FY20

    Set new all-time record.

    Diluted EPS
    $4.99up 19%
    Q1 FY20

    Set new all-time record.

    Cash plus marketable securities
    $207 billion
    Q1 FY20

    Total cash position at quarter end.

    Total debt
    $108 billion
    Q1 FY20

    After issuing a 2 billion euro green bond, retiring $1 billion of maturing debt, and reducing commercial paper by $1 billion.

    Net cash
    $99 billion
    Q1 FY20

    Maintaining target of reaching a net cash neutral position over time.

    Capital returned to shareholders
    nearly $25 billion
    Q1 FY20

    Includes accelerated share repurchase, open market repurchases, and dividends.

    Accelerated share repurchase program
    $10 billion
    Q1 FY20

    Resulted in initial delivery and retirement of 30.4 million shares.

    Open market share repurchases
    $10 billion
    Q1 FY20

    Repurchased 40 million Apple shares.

    Dividends and equivalents
    $3.5 billion
    Q1 FY20

    Paid to shareholders.

    Cash dividend per share
    $0.77
    Q1 FY20

    Declared by Board of Directors.

    Active installed base of devices
    1.5 billionup over 100 million in the last 12 months
    Q1 FY20

    Reached a new all-time high for each main product category and geographic segment.

    Services revenue growth
    17%over last year
    Q1 FY20

    Achieved new all-time record of $12.7 billion. Double-digit growth in all 5 geographic segments.

    Paid subscriptions
    over 480 millionup 120 million from a year ago
    Q1 FY20

    Across services on the platform, with paid accounts growing double digits in all geographic segments. Expected to surpass 500 million in Q2 FY20.

    App Store revenue growth
    strong double digits
    Q1 FY20

    Thanks to robust customer demand for both in-app purchases and subscriptions.

    Third-party subscription business growth
    almost 40%year-over-year
    Q1 FY20

    Grew across multiple categories.

    iCloud revenue growth
    very strong double digits
    Q1 FY20

    Generated an all-time revenue record.

    Wearables revenue growth
    44%
    Q1 FY20

    Within the Wearables, Home and Accessories category.

    App Store New Year's Day spending
    $386 million20% increase over last year
    New Year's Day

    New single-day record for customer spending.

    Apple News monthly active users
    over 100 million
    Q1 FY20

    Draws over 100 million monthly active users in specified regions.

    Apple Pay revenue and transactions growth
    more than doubledyear-over-year
    Q1 FY20

    Run rate exceeding 15 billion transactions a year.

    Apple Pay transactions run rate
    exceeding 15 billion
    Q1 FY20

    Annual run rate for Apple Pay transactions.

    iPhone trade-ins
    doublingversus last year
    Q1 FY20

    Contributed to strong double-digit growth in iPhone sales at retail and online stores.

    Apple Watch new customers
    over 75%
    Q1 FY20

    Of customers purchasing Apple Watch during the quarter were new to Apple Watch.

    Mac new customers
    around half
    Q1 FY20

    Of customers purchasing Macs during the quarter were new to that product.

    iPad new customers
    around half
    Q1 FY20

    Of customers purchasing iPads during the quarter were new to that product.

    iPad customer satisfaction (consumers)
    93%
    Q1 FY20

    Latest surveys from 451 Research.

    iPad customer satisfaction (businesses)
    92%
    Q1 FY20

    Latest surveys from 451 Research.

    Tablet purchase intent (March quarter)
    78%
    Q2 FY20

    Among both consumers and businesses planning to purchase tablets, 78% plan to purchase iPads.

    Fortune 500 healthcare companies using Apple technology
    100%
    Q1 FY20

    In areas such as patient experience, clinical communications, and nursing workflows.

    Industry KPIs

    9
    MetricValueDetails
    Capital return FCFnearly $25 billionUSD
    Unit shipments ASPiPhone 11 was top-selling model every week
    Gross margin drivers38.4%%
    Company specific kpis98%%
    Market share commentary6 of the top 7 selling smartphone models in Japan during the December quarter were iPhones
    Services peripheral attachover 480 millionpaid subscriptions
    Component supply constraintsproduct shortages
    Installed base refresh runway1.5 billiondevices
    Revenue mix by end market segmentiPhone: $56 billion; Services: $12.7 billion; Wearables, Home and Accessories: $10 billion; Mac: $7.2 billion; iPad: $6 billionUSD

    Deals & partnerships

    1
    Intelacquisition

    Completed the acquisition of Intel's baseband business during the December quarter. This is considered a very important core technology for the company.

    Capital programs

    1
    California Housing Availability and Affordability Planunderway$2.5 billion
    Start: November

    Plan to help address the housing availability and affordability crisis in California, aiming to keep the region vibrant and ensure it remains a great place for everyone to live and raise a family.

    Risks & headwinds

    4
    Coronavirus outbreak in ChinaQ2 FY20

    Wider-than-usual revenue guidance range ($63B-$67B) for Q2 FY20

    Mitigation: Working with alternate sources for suppliers in Wuhan, accounting for delayed factory re-openings, closing retail stores, reducing operating hours, and taking precautions in open stores.

    Supply constraints for Apple Watch Series 3 and AirPods ProQ1 FY20, ongoing into Q2 FY20

    Experienced product shortages due to very strong customer demand

    Mitigation: Hopeful Apple Watch Series 3 will balance during Q2 FY20; working hard to put in additional capacity for AirPods Pro with no current estimate for balance.

    Difficult year-over-year comparison for Mac and iPad revenueQ1 FY20

    Mac revenue $7.2B, iPad revenue $6B; demand around even to last year

    Mitigation: Due to launches of MacBook Air, Mac mini, and iPad Pro in the prior-year December quarter and subsequent channel fill.

    Regulatory changes in Japan impacting iPhone performanceQ1 FY20, ongoing

    Japan revenue down 10% during Q1 FY20

    Mitigation: Regulatory changes decoupled mobile phone pricing from 2-year contracts and capped carrier discounts. Despite this, iPhones were 6 of the top 7 selling smartphone models in Japan.

    Q&A highlights

    10

    What is driving the growth in Wearables, specifically the split between first-time buyers and upgraders for AirPods and Apple Watch?

    Wearables grew 44%, with Apple Watch seeing 75% of its customers being new to the product, indicating strong new customer acquisition. AirPods also performed very well in attracting new customers.

    “Apple Watch, in particular, 75% of the customers are new to the Apple Watch, and so it's still very much selling to new customers at this point.”

    asked by Amit Daryanani · answered by Timothy Cook

    2 min read5 chapters

    Detailed Narrative

    01

    Record-Breaking Quarter Driven by iPhone 11 Success

    Apple reported its highest revenue and earnings ever in Q1 FY20, with total revenue reaching $91.8 billion, exceeding the high end of guidance. This performance was primarily fueled by iPhone revenue, which grew 8% year-over-year to $56 billion, driven by exceptional demand for the iPhone 11, iPhone 11 Pro, and iPhone 11 Pro Max. The iPhone 11 was the top-selling model every week during the quarter, and the three new models were the most popular iPhones. Double-digit growth was observed in many developed markets like the U.S., U.K., France, and Singapore, as well as emerging markets including Brazil, Mainland China, India, Thailand, and Turkey.

    02

    Continued Strong Growth in Services and Wearables

    Services revenue achieved a new all-time record of $12.7 billion, growing 17% year-over-year, marking the fifth consecutive quarter of double-digit growth outside of iPhone. This growth was broad-based, with double-digit increases across all five geographic segments and new records in categories such as cloud services, music, payment services, and App Store search ads. Wearables, Home, and Accessories also delivered an 'incredible quarter,' setting an all-time record with $10 billion in revenue, up 37% year-over-year, driven by strong demand for AirPods, particularly AirPods Pro, and Apple Watch.

    03

    Expanding Installed Base and Ecosystem Engagement

    The active installed base of Apple devices surpassed 1.5 billion globally, an increase of over 100 million in the past 12 months, reaching new all-time highs across all main product categories and geographic segments. This growing installed base is seen as a powerful testament to customer satisfaction and loyalty, and a key driver for growth, especially in Services. Customer satisfaction for iPhone 11 models combined was 98% in the U.S., and 84% of business buyers planning smartphone purchases intended to buy iPhones. Similarly, 75% of Apple Watch purchasers were new to the product, indicating continued market expansion.

    04

    Impact of Coronavirus on Q2 FY20 Outlook

    Management provided a wider-than-usual revenue guidance range for Q2 FY20 ($63 billion to $67 billion) due to the uncertainty surrounding the coronavirus outbreak in China. The company has suppliers in the Wuhan area with alternate sources and is working on mitigation plans. Factories outside Wuhan are experiencing delayed re-opening after Chinese New Year, impacting the supply chain. Customer demand is also affected, with one retail store closed, many channel partners' storefronts closed, and reduced operating hours for remaining stores, leading to impacted retail traffic across the country.

    05

    Capital Allocation and Financial Strength

    Apple ended the quarter with $207 billion in cash and marketable securities. After issuing a 2 billion euro green bond and retiring $1 billion of maturing debt, net cash stood at $99 billion, maintaining the target of reaching a net cash neutral position over time⏳. The company returned nearly $25 billion to shareholders during the December quarter, including a $10 billion accelerated share repurchase program that retired 30.4 million shares, an additional $10 billion in open market repurchases of 40 million shares, and $3.5 billion in dividends.

    AI-generated summary of the company’s earnings call. Not investment advice.