Good day, and welcome to the Apple Incorporated Second 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.

Thanks, Nancy. Good afternoon and thanks to all of you for joining us today. This has been an exciting and productive quarter for Apple. In my letter to investors at the beginning of January, I wrote that one of Apple's great strengths is our culture of flexibility, adaptability, and creativity. This quarter featured some important announcements that speak to the power of our commitment to innovation and long-term thinking. I'd like to start with some top-line highlights and then move into greater detail with you. I'll get started with financial results. Our revenue was $58 billion toward the high end of our guidance range. We see this result as a positive outcome in light of ongoing headwinds from weaker foreign currencies relative to the U.S. dollar. In constant currency, our year-over-year revenue performance would have been 200 basis points better than our reported results indicate. We had great results in a number of areas across our business. It was our best quarter ever for Services with revenue reaching $11.5 billion. We had a blockbuster quarter for iPad, with revenue up 22% from a year ago. This is our highest iPad revenue growth rate in six years. And it was another sensational quarter for Wearables with growth near 50%. This business is now about the size of a Fortune 200 company, an amazing statistic when you consider it's only been four years since we delivered the very first Apple Watch. I'll talk more about these categories later. While we grew year-over-year in developed markets, and while we had record March quarter results in a number of major markets including the United States, Canada, the United Kingdom, and Japan, we did experience a revenue decline in emerging markets. But we feel positive about our trajectory. Our year-over-year revenue performance in Greater China…

Thank you, Tim. Good afternoon, everyone. Revenue in the March quarter was $58 billion near the high end of the guidance range that we provided 90 days ago and down 5% from last year. Our revenue decline reflects 200 basis points of negative foreign exchange, due to the strength of the U.S. dollar. Overall, products revenue declined 9% driven primarily by iPhone, while Services revenue grew 16% to a new all-time record. We also set a new March quarter record for Wearables Home and Accessories, and we recorded our best iPad growth rate in six years. Company gross margin was 37.6% in line with our guidance. Products gross margin was 31.2% down about 310 basis points sequentially due to the seasonal loss of leverage and headwinds from foreign exchange. Services gross margin was 63.8%, up 100 basis points sequentially due to a different mix and leverage from higher revenue. Net income was $11.6 billion. Diluted earnings per share were $2.46 and operating cash flow was $11.2 billion. Let me provide more color for our various revenue categories. iPhone revenue was $31.1 billion. We're seeing positive customer response to recent pricing actions in certain emerging markets, as well as enhancements to our trade-in and financing programs. And our year-over-year performance improved relative to our December quarter results in Greater China, in the Americas and in Japan. Our active installed base of iPhone reached a new all-time high at the end of March. This growing installed base reflects the industry leading satisfaction and loyalty of our customers. The latest survey of U.S. consumers from 451 Research indicates customer satisfaction of 99% for iPhone XR, XS and XS Max combined. And among business buyers, who plan to purchase smartphones in the June quarter, 81% plan to purchase iPhones. Turning to Services. As Tim…

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

Certainly. Our first question will come from Shannon Cross with Cross Research.

Thank you very much for taking my question. Tim, can you talk a bit more about what you're seeing in China? Clearly, it looks like things are improving sequentially. You also mentioned that last few weeks of the quarter, were stabilizing in emerging markets, I believe. So what are customers saying there and what are your partners saying in China? And then I have a follow-up.

Yeah. Thanks for the question, Shannon. We're seeing -- in the iPhone space, we saw a better year-over-year performance in the last weeks of the quarter as compared to the full quarter or November and December, which was sort of a -- it appears to be the trough. I think there's a set of reasons for this. One, we made some price adjustments essentially backing out the weaker currency effect and then some. There's stimulus programs that the government has executed including -- and this happened in early April, VAT being reduced from 16% to 13%, so they've been aggressive in the stimulus side. Three, our trade-in and financing programs that we’ve implemented in our retail stores have been very well received there, and I'm happy with the results to date there. And then four, there's an improved trade dialog between the U.S. and China. And from our point of view, this has affected consumer confidence on the ground there in a positive way. And so, I think it's a set of all of these things and we certainly feel a lot better than we did 90 days ago.

Great. Thank you. And then, I'm sure you're probably expecting a question on Qualcomm settlement. So what would you like to say on this settlement? How are you thinking about your component providers going forward? And how should we think about this with regard to -- I don't know your development plans in the future because I'm sure you're not going to talk about when you're going to do 5G, but clearly it helps that path. Thank you.

Yeah. Thank you, Shannon. We're glad to put the litigation behind us, and all the litigation around the world has been dismissed and settled. We're very happy to have a multi-year supply agreement, and we're happy that we have a direct license arrangement with Qualcomm, which was I know important for both companies, and so we feel good about the resolution.

Thank you, Shannon. Can we have the next question, please?

The next question will come from Samik Chatterjee with JPMorgan.

Hi. Thanks for taking the question. Tim, you talked about China responding well to these pricing actions that you've taken in that market. Do any of those learnings kind of carry through into how you decide pricing in the remaining emerging markets, like India, et cetera as you get ready for the next product cycle?

We have made some adjustments in India, and we've seen preliminarily some better results there. Everything that we do does advise everything we do in the future, so we try to learn the best we can and hold [ph] that into our thinking, and we'll obviously do that with this as well.

Thank you. I just had a quick follow-up for Luca on the Services side. Luca, we see that you're guiding to higher operating expenses quarter-on-quarter. How much of that incremental is going in to support the new services that you're planning to launch later in the year?

Yeah. Of course, we are supporting both our products and services business and you can see the trajectory of our OpEx over the different quarters. Clearly as we add new services, we will need to make the necessary investments to support them. Our Services business has multiple streams. In total, it is accretive to company gross margins. You've seen the latest -- we're running services margins at over 60%. So, it's a very important business for us in many ways for our ecosystem and for our ability to monetize it. And so, clearly we will make all the necessary investments to ensure that the new services are successful, and we're really encouraged by the level of customer response that we received so far in anticipation for the launch of these services.

Thank you, Samik. Can we have the next question please.

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

Thank you. Luca, if I look back over the past five years, June quarter revenue typically declines about 15% from the March quarter. You're guiding to an 8% drop this year. So can you just talk about, which regions or product segments you think can outperform that typical seasonality?

Yes, Katy. And keep in mind by the way, we are reporting this guidance including a 300 basis point negative impact from foreign exchange, so actually in constant currency the numbers would be even stronger. At the product category level, we expect that we will continue to have strong revenue growth from the non-iPhone categories as we've had for the first half of our fiscal year. We're also expecting a relative improvement in our iPhone performance on a year-over-year basis in Q3 versus the first half. As Tim said, March was the strongest month of the quarter on a year-over-year basis and so this has given the confidence to provide the guidance that you've seen. Geographically, of course, as you've seen from our results for the March quarter, China is the geo where we found some challenges, but we believe the trajectory should improve over time.

Thank you. And then just as a follow-up, Shannon said you're not going to talk specifics around the timing of the 5G phone, but Tim maybe you can talk about how the company approaches a new technology like this given the higher cost but also potentially significant benefit, how you think about the right timing for coming to market with a product, with those characteristics? And then just generally how meaningful you think 5G is as a demand driver for upgrades in your iPhone installed base? Thank you.

Katy, this is one that I'm going to largely punt on as you would probably guess. We look at a lot of things on the different technologies and try to look at the -- and select the right time that things come together and get those into products as soon as we can. And the -- certainly from a cost point of view there has been -- the technologies have had cost pressure over the last couple of years or so. On the flip side of that there's a number of things in the commodity markets going in the other direction at the moment like DRAM and NAND. And so it's difficult to project what happens next, but it's the aggregate of all of it that really matters from a price point of view.

Thank you, Katy. So we have the next question, please.

Jim Suva from Citi has our next question.

Thank you very much. A topic that's probably split or shared by both Tim and Luca on a response, but I'll ask the question and you can decide how to divide it up. In your opening remarks, Tim, you'd mentioned about pricing adjustments that you made in some of the markets and then Luca talked also about the strength of the trade-in program or maybe it was Tim also. Can you help us understand about what type of lessons or elasticity you've learned about pricing and the trade-in programs of how it impacts like revenues and COGS and margins and things? Thank you.

Yeah. Jim, in the opening remarks I was really talking about China specifically. And I mentioned four things that I believe are responsible for the better year-over-year performance in the Q2 relative to Q1 and also the final weeks of March being better than the Q2 average. And those four are the price reductions, but that's one of them. But there are three others and one of the others is the trade-in and financing programs that we instituted in our retail stores. Clearly, what we've learned here and it's not a surprise really is that the -- many, many people do want to trade-in their current phone. It does -- from a customer user point of view the trade-in looks like a subsidy, and so it is a way to offset the device cost itself. And many people in literally every market that we've tried this in, there is a reasonable number of people that want to take and pay for something on installments instead of all at once. And so, it's a little different in each market in terms of what the elasticity is, but you can bet that we're learning quickly on all of those. The other two items that are not insignificant in China that I don't want to lose here is that the stimulus programs, I believe, are having an effect on the consumer. And the one that I got much visibility in -- that happened in early April was the VAT reduction from 16% to 13%, so it's a very aggressive move. But there are other stimulus programs as well that likely have an effect to the consumer level. And then finally -- and this is not to be under weighted either -- I think the improved trade dialogue between the countries affects consumer confidence in a positive way. And so, I think it's sort of the sum of all of those things.

And Jim, if I may add on the gross margin level as we look at pricing actions, of course, anytime you do a pricing action it is gross margin percentage diluted. But what really matters to us and what we look at -- when we look at the elasticity of these programs is to see the impact on our gross margin dollars. And what -- the experience that we've had in a few of these emerging markets has been positive in that respect and so that's what we think matters the most really.

Thank you so much, gentlemen.

Thank you, Jim. We have the next question, please.

The next question will come from Wamsi Mohan with Bank of America Merrill Lynch.

Hi. Yes. Thank you. Tim, you shared a lot of color around trade-ins, but I was also hoping maybe you can characterize what sort of dynamics you're seeing across your installed base on these trade-ins. What type of devices are being traded in? Is the profile of someone who has a really old iPhone? Or are you seeing folks that have newer iPhones trading in? And what sort of incentives are you providing beyond sort of the financing to drive that? And do you see this as something that can accelerate replacement cycles here over the next year or so? And I have a follow-up.

We're -- actually the product that's being traded in is all over the place, to be honest. It's 6, 6 Plus, 6S, 6S Plus, 7, 7 Plus and then fewer 8 and 8 Plus. But there's some of each of those and so you get customers that are on the two-year cycle and customers -- some customers on the one-year cycle and then customers as well on the three and four-year cycles. And so it's really all over the place. In terms of the incentives we're offering currently in our retail stores a trade-in value that has -- that is more than the sort of the blue book of the device if you will for lack of a better description. And so we have topped those up to provide an extra benefit to the user. The installments are different in each geography. I would say that at the moment the geography that is doing the best in installments would be China. And we have a bit of a unique offering there I think versus the -- versus what you can get in the regular market and so that probably further helps there. And so you can bet that we're learning on each of these finding the parts that the user likes the most. I think the key is we're trying to build a -- build something into the consumer mindset that it's good for the environment and good for them to trade in their current device on a new device. And we do our best of getting the current device to someone else that can use that or in some cases if the product is at an end of life we are recycling the parts on it to make sure that it can carry on in another form.

Thanks for the color Tim. And as my follow-up Luca can you just clarify if the settlement with Qualcomm is creating either a headwind or a tailwind to your gross margins in the near-term? And does your guidance contemplate incremental pricing actions that could be creating some gross margin headwinds? Thank you.

As Tim has explained we've reach this comprehensive agreement with Qualcomm. As part of this we have agreed that we're not going to share the financial terms of the agreement, so we plan to honor that. What you see in our gross margin guidance for the June quarter we guided 37% to 38% fully comprehends the outcome of the agreement with Qualcomm.

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

Mike Olson from Piper Jaffray has our next question.

Thanks for taking my question. So, you have more than 1.4 billion active devices and at your event you announced services that leverage that installed base. And you have obviously a remarkable position with kind of this Trojan horse of devices out in so many households. So, I guess, the question is and I know some of these services aren't even live yet but should we expect a continuation of the building out of new services categories like what we saw at the March event? Is there a pipeline of new services in the works? Or have we kind of seen what we're likely to see on that front for the near to intermediate term? And then I have a follow-up.

Yes, I wouldn't want to get into announcing things on the call, but obviously, we're always working on new things. And -- but we're right now we're really focused on getting these four out there. We have the News+ in the market today. We'll have the Apple Arcade and the Apple TV+ products in the market in the fall and Apple Card will go out in the summer timeframe. And so we've got lots in front of us and we're very excited about getting these out there.

Right. And then you mentioned the App Store search ad business a couple of times in the prepared remarks. Is that reaching a point where it's become material and maybe moving the needle for overall services revenue? Or is there anything you can quantify related to that? I also imagine that this is a high-margin business at least maybe higher than the overall Services margin but wondering if you can confirm if that's the case or not. Thanks.

It's growing very, very fast Mike. I think it was up around 70% over the previous year. We're expanding into new geographies as well and we still have more geographies out there that we think can move the dial further. So, it is a -- it's definitely a business that is big and getting bigger. A – Nancy Paxton: Thank you, Mike. Can we have the next question, please?

Our next question comes from Louis Miscioscia with Daiwa Capital Markets. Q – Louis Miscioscia: Okay and thank you for taking my question. Tim, when you look at the four things that you have announced. And I realize they have different dates when they're coming out but, which ones would you say over the next 12 months has the most potential to help your Services line? And then maybe, which one has the best long-term potential? And then, I have a quick follow-up. A – Tim Cook: We're going to wait until we get these things out. And what I can tell you right now is that the -- we're taking sort of consumer interest on the Apple Card and there's been a significant level of interest on that and we're excited. As you know the -- gaming is the top category on the App Store. And so the Apple Arcade will serve some of that market. And it serves it with a different kind of game, which we think will be great for developers and great for users. The TV+ product plays in a market where it's -- there's a huge move from the cable bundle to over the top. We think that most users are going to get multiple over-the-top products. And we're going to do our best to convince them that the Apple TV+ product should be one of them. And then, we're working very hard to get everyone to give Apple News+ a look. Because we think it's a very unique product. And I love magazines. And we have really wanted to support the publishers. And so, we're working very hard to -- at the -- but at the very beginning of the ramp there. We wouldn't do a service… Q – Louis Miscioscia: Okay, great.…

Thank you, Lou. A replay of today's call will be available for two weeks on Apple Podcasts as a webcast on Apple.com/investor and via telephone. And the numbers to the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 7060604. And these replays will be available by approximately 5:00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. And financial analysts can contact Matt Blake or me with additional questions. Matt is at 408-974-7406, and I'm at 408-974-5420. And thanks again for joining us.

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