Apple Inc. (NASDAQ: AAPL) Q2 2020 Results Conference Call April 30, 2020 5:00 p.m. ET
Tejas Gala – Senior Director, Corporate Finance and IR
Tim Cook – CEO
Luca Maestri – Chief Financial Officer
Conference call participants
Shannon Cross – Cross Search
Wamsi Mohan – Bank of America
Katy Huberty – Morgan Stanley
Amit Daryanani – Evercore
Jeriel Ong – Deutsche Bank
Samik Chatterjee – JP Morgan
Chris Caso – Raymond James
Have a good day everyone. Welcome to the Apple Incorporated Fiscal 2020 Second Quarter Results Conference Call. Today’s call is recorded.
At this point, for opening remarks and presentations, I would like to turn the floor over to Mr. Tejas Gala, Senior Director, Corporate Finance and Investor Relations. Go for it.
Thank you. Hello and thank you for joining us.
Apple’s first CEO, Tim Cook, will be followed by CFO Luca Maestri. After that, we’ll open the analysts’ questions.
Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including, but not limited to, those relating to revenues, gross margin, operating expenses, other income and expenses, taxes, capital allocation and future business prospects, including the potential impact of COVID-19 on the business and results of operations of the Company.
Actual results or trends may differ materially from our forecasts. For more information, please refer to the risk factors discussed in Apple’s latest periodic reports on Forms 10-K and 10-Q and Form 8-K filed with the SEC today, as well as the associated press release.
Apple assumes no obligation to update any forward-looking statements or information, which speak to their respective dates.
I would now like to call Tim for opening remarks.
Thank you, Tejas. Good morning all. Thank you for joining us today. I hope you stay safe and secure.
Today, Apple has $ 58.3 billion in sales, an all-time high for services and a quarterly high for clothing, home and accessories. It is also a record quarterly revenue for Apple Retail driven by the phenomenal growth of our online store. In the most difficult global environment in which we have ever operated our business, we are proud to say that Apple experienced growth during the quarter.
But before I dive deeper into the numbers, I would like to talk a bit about COVID-19. This is a problem that Apple has faced since January. And I think the way we reacted, what we were inspired to do, tells an important story about the great sustainability of Apple as a business and the lasting importance of our products in the lives of our people. clients. It also testifies to Apple’s unparalleled ability to be creative to always think long term and to move forward when others may feel an instinct to withdraw.
Before COVID-19 loomed on the horizon, we thought T2 was going to be a prolific and energetic time for Apple. And when the pandemic broke out, our teams not only succeeded in developing the business by introducing new powerful products and meeting the needs of our customers, but they also seized the opportunity in terms of meeting our obligations more broad towards the communities in which we live and work.
Let’s take a quick look at the whole business. At the same time as they spared no effort to have our latest generation of devices manufactured in the hands of our customers, our global network of supply chain, logistics and operations partners in every part of the The company also sourced more than 30 million masks for front-line medical workers, ensuring they are donated to the most needy places in all regions of the world.
As our product teams prepared to launch a new iPad Pro, Magic Keyboard, MacBook Air and the new iPhone SE, all of which were well received by critics and consumers alike, they also worked with our suppliers to design, test, manufacture and distribute more than 7.5 million face masks, and we continue to ship more than one million each week to primary care physicians, nurses and medical personnel.
In a quarter in which our Services teams experienced strong growth, on which Luca will dig in a minute, and which testifies to the real sustainability of our Services strategy, these teams also placed COVID-19 in the foreground. As Apple News reached 125 million active users per month, we raised reliable information from reliable sources via a special COVID-19 vertical.
We allow customers to skip payments without generating interest on the Apple card for March and April, given the financial difficulties of many families. We worked with everyone from Oprah to Lady Gaga to inform, entertain and give back via Apple TV and services like FaceTime and Messages set new all-time records for daily volume this quarter, with users counting on their devices to stay connected in a new reality. .
In software, while our teams are working with great creativity and enthusiasm as we prepare to deliver our very first Global Online Developer Conference later this quarter, they have also worked with the same creativity and the same speed to assemble our COVID-19 symptom. website and app verification in partnership with the CDC. To date, the app has been installed almost 2 million times and the web tool has received more than 3 million unique visits. And this month, to speed up contact tracking, we’re launching a joint effort with Google to enable the use of Bluetooth technology to help governments and health agencies reduce the spread of the virus with privacy and security. of users at the heart of the design.
We have combined these programmatic efforts with a broader strategy to get back to where they were most needed. We have made significant corporate donations to respond to efforts around the world to support the citizens of the world as well as a new fund for Americans facing food insecurity in the aftermath of the crisis. When you compile these and envision our continuous 2 to 1 match for employee donations, Apple’s contributions to the global response are important, diverse, and a source of great pride for the entire chain.
We are also doing what we can to help our employees, their families and, by extension, their communities to stay safe and well by modifying our operations, if necessary. This of course extends to our retail employees, their Apple space to our customers and an essential part of our business and we normally compensate them despite store closings.
In a quarter where circumstances change from hour to hour, we were pleased with the resilience and adaptability of our global supply chain. Although we experienced temporary supply constraints in February, our operations team, suppliers and manufacturing partners returned to work safely and production returned to typical levels in late March.
In this age of social distance, closed school and gathering places, delayed projects and new ways of socializing, we have seen significant evidence that our products have taken on renewed importance for customers. Teachers and students around the world rely on our technology to teach, learn and stay connected with each other. We are in the process of deploying large iPad controls in school systems to maintain distance learning, including tens of thousands in Ontario, Canada; Glasgow, Scotland and Puerto Rico, 100,000 in the city of Los Angeles and 350,000 in the city of New York, our largest educational iPad deployment to date.
Since the beginning of March, we have seen an unprecedented demand for professional application from students, enthusiasts and creative professionals. These people entertain and inspire us all while we are at home. And to help them do that, we’ve made Final Cut Pro X and Logic Pro X available free for 90 days for everyone. And the response has been overwhelming, driving software downloads and usage to record levels.
And doctors and health care professionals are using Apple Watch and other health features even more to communicate and treat patients safely from a distance if necessary. With the new FDA guidelines on non-invasive remote patient monitoring, for example, the ECG app on Apple Watch is increasingly used to facilitate remote ECG measurements and recordings for telemedicine, thereby reducing contacts and exposure of patients and providers. Many hospitals such as Geisinger Health System, NYU Langone Health and Stanford Health Care use applications on iPad and iPhone to support communication and videoconferencing between inpatients and their healthcare teams. This allows healthcare teams to closely monitor patients without entering isolation rooms, which helps minimize exposure and reduce the need for personal protective equipment.
Now, when you take a step back and compile all of this, when you consider all the ways COVID-19 has affected Apple, our customers and our way of working, it may not be the quarter it could have being absent from this pandemic, but I don’t think I can remember a quarter where I was more proud of what we do or how we do it.
As I said at the start, we had $ 58.3 billion in revenue and below that $ 45 billion in product revenue. The performance of our product activity went through three very different phases during the March quarter. Based on Apple’s performance in the first five weeks of the quarter, we were confident that we were headed for a record second quarter at the very high end of our expectations. During the next five weeks of the quarter, when COVID-19 started reaching China, iPhone supply was temporarily affected, as was demand for our products in China. This led us to withdraw our revenue forecast in February. At this point, demand for our products outside of China was still strong and in line with our expectations. During the last three weeks of the quarter, as the virus has spread worldwide and social distancing measures have been implemented worldwide, including the closure of all of our retail stores in outside of Greater China on March 13, and many partner outlets around the world, we saw downward pressure on demand, particularly for iPhones and portable devices.
Due to the lack of visibility and short-term uncertainty, we will not be releasing a forecast for the next quarter. In the long term, however, we have great confidence in the sustainability of our business. Our global supply chain is deeply sustainable and resilient. We have demonstrated the constant ability to identify and manage temporary supply problems such as those caused by COVID-19. We have continued to offer innovative new products in several categories that appeal to a wide range of customers, including the all-new iPhone SE, which has reached unparalleled technological capacity at incredible value.
Our teams around the world have approached the complexities of this moment with unparalleled creativity, good humor and dedication to our customers. For a business with commercial innovation, there are real downsides to having to periodically figure out how to do everything in a whole new way.
Our long-term investment in our service strategy is successful. This business is growing and reflects our large and growing installed base. We expect to reach our long-standing goal of doubling our service revenues in fiscal 2016 by 2020. We have always led Apple for the long term. We entered this period with unrivaled financial pressure, solid cash flow and our best product portfolio to date.
Major investments, including our five-year commitment to contribute $ 350 billion to the economy here in the United States, are moving ahead at full speed. It’s in these moments that we stand out. We have always managed the tough times by doubling down and investing in the next generation of innovations. And that’s our strategy today.
And so, even if we cannot say for sure how many chapters are in this book, we can be sure that the end will be good. Apple will continue to do everything we can to help the global response and to keep our customers learning, creating, sharing and connecting so life can stay as normal as possible during this difficult time.
With that, I’m going to hand things over to Luca.
Thanks, Tim. Good morning all.
This quarter was very different from what we expected when we last spoke to you in late January. But we couldn’t be more proud of our Apple teams around the world, our role in supporting local communities and our partners along the value chain, and the resilience of our business and financial performance in these times. difficult.
Revenues for the quarter were $ 58.3 billion, up 1% from a year ago, despite the extreme circumstances of the impact of COVID-19 and a headwind of 100 points. foreign exchange base. Product revenues reached $ 45 billion, down 3%.
After a very strong month of January, our performance was impacted in particular during the last three weeks of the quarter when the closings and closings of points of sale increased due to the diffusion of COVID-19 worldwide and affected our product sales. However, based on demand, our performance was higher than our announced results, as we reduced the inventory of iPhone channels more than a year ago. It is important to note that our installed base of active devices has reached a record level in all of our geographic segments and all major product categories.
Services turnover followed a different trend with very strong year-on-year growth of 17%. We set a new revenue record of $ 13.3 billion, with absolute records in many of our service categories and in most of the countries we track. I will provide more details on this later.
The company’s gross margin was 38.4%, stable sequentially with cost savings and a change in mix towards services offset by the seasonal loss of leverage. Product gross margin was 30.3%, sequentially decreasing 380 basis points due to loss of leverage and an unfavorable mix. This decline was more pronounced than under normal circumstances due to the impact of COVID-19 which I mentioned earlier.
The gross margin for services was 65.4%, up 100 basis points sequentially, driven by a favorable mix. Our declared tax rate for the quarter was 14.4%. This was below our target of 16.5% due to discrete one-off items.
Net earnings were $ 11.2 billion and earnings per share were $ 2.55, up 4%. Cash flow from operations was very strong at $ 13.3 billion, an improvement of $ 2.2 billion from a year ago.
Let me go into more detail for each of our income categories.
IPhone revenues of $ 29 billion decreased 7% year-over-year as iPhone supply and demand was affected by the impact of COVID-19 at one point during the quarter.
On the supply side, we suffered from some temporary supply shortages in February, but we are extremely pleased with the resilience and adaptability of our global supply chain, as well as its ability to put people back to work safely when circumstances allow. Our operations team and manufacturing partners have made extraordinary efforts to quickly restore production and we have left the quarter in a good supply position for most of our product lines.
On the demand side, after very strong first five weeks, we saw the impact of COVID-19 affect demand in China for the next five weeks, then more widely in the world for the last three weeks of the quarter, when blockages and the point – sales closings have become widespread in many countries.
Although we saw a slight lengthening of our replacement cycle towards the end of the quarter, which we attribute to widespread store closings, our active installed base of iPhones reached a record level. This is a testament to the quality of our products and the strength of our ecosystem. In fact, in the U.S., the latest 451 Research consumer survey shows 99% iPhone customer satisfaction for iPhone 11, 11 Pro and 11 Pro Max handsets.
Let’s move on to services. We set an absolute revenue record of $ 13.3 billion with strong performance across the board with absolute revenue records in the App Store, Apple Music, video, cloud services and our ad business on the App Store. And we also set a March quarter record for AppleCare. Our new services, Apple TV Plus, Apple Arcade, Apple News Plus and Apple Card continue to add users, content and functionality while contributing to overall service growth.
As Tim mentioned, we are on track to reach our goal of doubling our revenue in tax services in 2016.
App Store revenue increased double-digit, driven by strong customer demand for in-app purchases and subscriptions. Our third party subscription business has grown in several categories and has grown by more than 30% year-over-year, reaching a new all-time high. Our first party subscription services also continued to work very well. Apple Music and cloud services both set a revenue record and AppleCare set a record for the March quarter. Paid subscriptions for these three services are up sharply in double digits.
Customer engagement in our ecosystem continues to grow strongly, and the number of transaction accounts and paid accounts in our digital content stores hit an all-time new record in the March quarter. In particular, the number of paid accounts increased by double digits in all of our geographic segments. We now have more than 515 million paid subscriptions across all services on our platform, up 125 million from a year ago. On a sequential basis, paid subscriptions increased by more than 35 million. This is the highest sequential growth we have ever seen. With this momentum, we are confident that we will reach our increased target of 600 million paid subscriptions by the end of the 2020 calendar.
Clothing, home and accessories set a new record for the March quarter with revenues of $ 6.3 billion, up 23% year over year with a solid double-digit performance in the five geographic segments.
Our apparel business is now the size of a Fortune 140 business, and we are very excited about the many opportunities available to us for this product category. For example, Apple Watch continues to expand its reach, as more than 75% of the customers who bought an Apple Watch worldwide during the quarter were new to the product.
Next, I would like to talk about Mac and iPad. Mac sales were $ 5.4 billion; The iPad’s revenue was $ 4.4 billion. Towards the end of the quarter, we launched a brand new iPad Pro which includes a first class LiDAR scanner with really exciting augmented reality applications; and MacBook Air with dramatically improved performance at a lower price. We are very satisfied with the keen interest of customers in both products.
Above all, about half of the customers buying Macs and iPads worldwide during the quarter were new to the product, and the active installed base for Macs and iPads reached a new all-time high. And the most recent consumer surveys from 451 Research have measured customer satisfaction at 95% for iPad and 96% for Mac.
In the corporate market, companies around the world have made the transition to remote work. We have created content to assist our customers in this transition, including a video-on-demand learning series focused on topics such as remote iPad and Mac deployments and security. We also realigned our own retail and corporate teams to provide timely and relevant support to customers who navigate new work environments. Some of our larger customers offering Macs to employees such as IBM and SAP were able to rotate quickly to allow employees to easily configure and secure their home devices, benefiting from Apple Business Manager and contactless deployment .
And we’ve seen countless examples of new remote deployment projects implemented in just a few hours. Platoon, for example, worked with our New York teams to deploy an entire fleet of Macs overnight, so their team could work remotely.
In critical sectors, such as grocery stores and financial services, we have seen organizations adopt our technology to better serve their customers safely. Leading grocers around the world, such as Trader Joe’s, Woolworths, Lawson’s, Sainsbury’s, Lidl and Carrefour, offer Apple Pay so customers can use contactless payments. And as stores evolve to become online fulfillment centers, organizations are leveraging apps for remote shoppers and food delivery to reduce pedestrian traffic.
In the banking industry, where security and securities are a top priority, one way to protect company and customer information is to provide enterprise iOS devices to employees who use cell phones on a daily basis of their work. For example, Bank of America purchases tens of thousands of additional iOS devices for its staff.
Let me now turn to our cash flow situation.
First, I want to point out that liquidity has not been a problem for us in these very unusual financial market conditions. We have an extraordinarily solid balance sheet, very deep access to the capital markets and an unrivaled generation of free cash flow. We ended the quarter with $ 193 billion in cash plus marketable securities, total debt of $ 110 billion. As a result, net cash was $ 83 billion at the end of the quarter. We delivered $ 22 billion to shareholders in the March quarter, including $ 18.5 billion through free market buybacks of 64.7 million Apple shares and $ 3.4 billion in dividends and the like.
Finally, as we progress through the June quarter, I would like to give some color to what we are seeing, which includes the types of forward-looking information that Tejas referred to at the start of the call.
As Tim mentioned, given the lack of visibility and certainty in the short term, we will not be issuing guidelines for the next quarter. However, based on what we saw in April and how we think things might turn out, I would like to provide additional information on the headwinds and the headwinds we face.
From a currency perspective, the US dollar has appreciated recently against most currencies in the world. As a result, we expect our operating revenues to be adversely affected by more than $ 1.5 billion year over year. Our global supply chain is back up and running. We are in a typical supply position, including our usual ramp associated with recently launched new products. These newly launched products, iPad Pro, MacBook Air and iPhone SE have all received exceptional customer response, even in these extreme circumstances.
On iPhone and Wearables, we expect year-over-year revenue performance to deteriorate in the June quarter compared to the March quarter; on iPad and Mac, we expect year-over-year revenue performance to improve in the June quarter.
On services, we observe two distinct trends. First, customers are actively engaging with our ecosystem and digital services, and we believe that the very good recent performance of the App Store, video, music and cloud services will continue throughout the quarter. June. Second, because of the overall decline in the level of economic activity, due to closings around the world, services like AppleCare and advertising are affected. AppleCare includes our product repair activities and warranty agreements with our customers, both of which have been affected by store closings and reduced levels of customer traffic. Advertising, which includes third party agreements, our App Store search ads and Apple News ads, has been affected by overall economic weakness and uncertainty about when companies will reopen.
For the gross margin, the sequential headwinds include currencies, product composition and seasonal loss of leverage on our product activity. The currencies will have a sequential impact of 70 basis points and an impact of 130 basis points over twelve months. When it comes to the product line, keep in mind the comments we have provided in terms of revenue. Sequential tailwinds include cost savings and a change in mix to services.
Regarding the allocation of capital, our approach remains unchanged. We continue to confidently invest in our future while delivering value to our shareholders. We are expanding our most exciting portfolio of products and services ever, while contributing more than $ 350 billion to the U.S. economy and expanding our footprint in many cities across the country over a period of time. five years old.
We also continue to believe that our stocks have great value and we maintain our goal of achieving a net cash position over time. Pour témoigner de la confiance que nous accordons à nos activités d’aujourd’hui et de demain, notre conseil d’administration a autorisé 50 milliards de dollars de rachats d’actions en plus de l’autorisation de plus de 40 milliards de dollars restant dans le cadre du plan de rachat d’actions actuel. Notre conseil d’administration a également autorisé une augmentation de 6% de notre dividende trimestriel et a déclaré aujourd’hui un dividende en espèces de 0,82 $ par action ordinaire, payable le 14 mai 2020 aux actionnaires inscrits au 11 mai 2020.
Enfin et surtout, nous gérons Apple à long terme, comme nous l’avons toujours fait. Historiquement, en période d’incertitude, nous avons continué d’investir dans l’entreprise et cela reste notre philosophie. Nous continuerons de nous concentrer sur ce que nous faisons de mieux, en investissant dans notre portefeuille de produits et services, en gérant les affaires avec sagesse et en prenant soin de nos équipes et nous pensons que nous sortirons de cette situation plus forts.
Sur ce, ouvrons l’appel aux questions.
Gala de Tejas
Merci, Luca. Nous vous demandons de vous limiter à deux questions. Opérateur, vous avez peut-être la première question, s’il vous plaît?
Séance de questions et réponses
Yes. Cela proviendra de Shannon Cross, Cross Research.
Merci beaucoup d’avoir répondu à ma question et j’espère que tout le monde va bien. Tim, vous avez parlé d’une amélioration au cours de la seconde moitié d’avril. Je me demandais donc si vous pouviez parler un peu plus sur le segment, la base géographique, ce que vous voyez et dans les différentes régions dans lesquelles vous vendez et ce que vous entendez de vos clients. Et puis, j’ai un suivi. Thank you.
Bien sûr, Shannon. Si vous regardez – je vais commencer par la Chine. Si vous regardez ce qui s’est passé en Chine, nous avons eu un très bon janvier. Le verrouillage a commencé là-bas vers la fin janvier, comme vous le savez. En février, nous avons assisté à une forte baisse de la demande. Nous avons fermé nos magasins en février. Le verrouillage étant terminé à la mi-février, vers la deuxième moitié de février, nous commençons à ouvrir des magasins. Nous avons ouvert sur une base échelonnée qui a pris environ 30 jours jusqu’à la mi-mars. Et du point de vue de la demande, nous avons ensuite constaté une amélioration en mars par rapport à février. Et si vous regardez où nous en sommes aujourd’hui, nous avons constaté une nouvelle amélioration en avril par rapport à mars. Et donc, c’est la Chine.
Si vous regardez le reste du monde, nous nous en sortions très bien en janvier, les cinq premières semaines du trimestre. Et nous pensons que nous nous dirigions vers le genre de haut de gamme de nos attentes dont nous vous avions parlé lors du dernier appel. Les cinq semaines suivantes ont été consacrées à réagir et à remettre la chaîne d’approvisionnement en vigueur et à surmonter la forte baisse en Chine dont j’ai déjà parlé. La vraie chose pour le reste du monde s’est produite en mars lorsque les commandes de refuge sur place sont entrées et que le travail à domicile a commencé. Pour ces deux, trois semaines, à la fin du trimestre, nous avons vu une forte baisse de la demande.
Si vous sortez maintenant en avril et regardez cela, début avril a commencé comme fin mars, mais dans la seconde moitié d’avril, nous avons vu une légère augmentation dans tous les domaines. Ce n’est pas seulement lié à une certaine géo ou à un certain produit. Nous pensons qu’en le regardant, une partie est due uniquement à nos nouveaux produits, une partie est due aux programmes de relance qui entrent en vigueur en avril, puis une partie est probablement le comportement des consommateurs de savoir que c’est va continuer un peu plus longtemps et obtenir certains appareils et ainsi de suite alignés pour travailler plus à la maison. En particulier, comme je pense que Luca l’a partagé, nous pensons que l’iPad et le Mac vont s’améliorer d’année en année au cours de ce trimestre, et que les clients qui suivent une formation en ligne ou travaillent à distance. Donc, réponse complexe à votre question, mais c’est ce que nous voyons.
Thank you. C’était utile. Luca, à moins que je ne l’ait manqué, vous avez parlé de diverses options de vente pendant le trimestre, mais vous n’avez pas vraiment discuté des dépenses d’exploitation. Je sais que vous avez mentionné des économies sur la ligne COGS. Je suis curieux de savoir comment vous pensez de vos dépenses et OpEx, étant donné certains des défis macro auxquels vous pouvez être confrontés. Thank you.
Yes. Donc, Shannon, comme nous l’avons dit, nous gérons l’entreprise à long terme, non? Ainsi, nous savons que le cœur de métier, le cœur de l’entreprise est l’innovation et le développement de produits et services. Nous continuerons donc d’investir dans notre pipeline. Nous sommes très heureux de ce que nous avons en magasin. Et donc, nous continuerons d’investir là-bas. De toute évidence, nous sommes conscients de l’environnement et donc, nous gérerons étroitement la partie SG&A de l’entreprise. Nous faisons de nouveaux investissements dans les nouveaux services que nous avons lancés récemment. Comme vous le savez, nous avons acheté les activités de bande de base d’Intel. Et évidemment, nous voulons développer cette technologie parce que nous considérons que c’est une technologie de base pour nous. Et donc, nous essaierons d’équilibrer la nécessité de continuer à investir dans des circonstances difficiles et le fait que nous aimons bien gérer l’entreprise.
Gala de Tejas
Merci, Shannon. Pouvons-nous avoir la question suivante, s’il vous plaît?
Ce sera de Wamsi Mohan de Bank of America.
Yes. Thank you. Tim, je pense que je parle au nom de tout le monde sur l’appel que nous sommes tous très reconnaissants de la contribution d’Apple pendant cette pandémie. Nous l’apprécions tous.
Merci beaucoup pour ça.
Tim, lors des ralentissements passés, nous n’avons pas vraiment vu Apple se retirer de l’investissement. Et vous, en tant qu’entreprise, avez largement maintenu la cadence de lancement du produit. Mais étant donné que ce sont des temps sans précédent et qu’il y a beaucoup de défis associés au développement de produits, à une époque où vous avez une empreinte mondiale pour de telles activités et incapable de vraiment faire beaucoup de choses en personne. Comment devrions-nous penser au développement du produit et à la cadence d’introduction au cours des prochains trimestres? Et faites un suivi.
Eh bien, nous continuons à fonctionner. Et comme vous pouvez le constater, avec tout le reste, nous avons pu lancer et expédier l’iPhone SE, l’iPad Pro avec le Magic Keyboard et le MacBook Air. Et donc, l’entreprise continue et les nouveaux produits sont notre force vitale. Et donc, nous continuons à travailler. Tout le monde s’habitue au travail à domicile. Dans certains domaines de l’entreprise, les gens sont peut-être encore plus productifs dans d’autres domaines, ils ne sont pas aussi productifs. And so, it’s mixed, depending upon what the roles are. But, as you can tell from what we did this quarter, despite the environment, we have our head down, are working because we know that our customers want the products that we’ve got. They’re even more important in these times.
Thank you, Tim. As a follow-up, I know you’re doing a lot with both the Apple Card and financing plan for iPhones to get your products in the hands of customers. But, I was wondering, would you consider using the strength of your balance sheet maybe a little differently, structure maybe deferred payments or things like that, or do you think that there could be other steps like bundling that you will consider versus what you already currently do? Thank you.
Well, as you know, we launched the payment plan earlier on Apple Card for iPhone. We’re working on doing that for other products as well. And you’ll see something on that shortly. So, we’re very-focused on the affordability point. The trade-in programs also are fairly wide across the board and act as both something great for the environment, also something great from a way to get that entry price down. In terms of deferred payments, nothing to announce today. But, as you know, having access to the card, at least in the United States, gives us more degrees of freedom. And that is not using our balance sheet. But, we play a key role in deciding what kind of programs go with the card.
Thanks, Wamsi. Can we have the next question, please?
That will come from Morgan Stanley’s Katy Huberty.
Thank you for the question. I hope the whole team is staying healthy and safe. Tim, I want to start on a longer term question. Where do you see structural changes on the back of this health crisis that might present opportunities for new revenue streams at Apple? And I’m particularly thinking about your past comments on health and augmented reality. But I’m sure there is even more areas of inspiration and creativity coming out of the company. And then, I have a follow-up.
I think, there are things from just a great reminder of how important our products are for remote work. And it’s pretty clear to me that where things will get a lot closer to normal than they are today, obviously. I think many people are finding that they can learn remotely. And so, I suspect that trend will accelerate some. I think that’s probably also true about working remotely in some areas and in some jobs. And so, I think we have significant solutions and products for all of those groups. On the health area, I gave some examples in my opening comments about the ECG being used on the Watch. You can bet that we’re looking at other areas in this. We were already doing that because we viewed that that area was a huge opportunity for the Company and a way for us to help a lot of people. And so, you will see us continue on that. I wouldn’t say that the health door opened wider. I would say, it was already opened fairly wide.
D’accord. And then, as a follow-up, the $50 billion share repurchase authorization is impressive in absolute terms, but it is a bit lower than the last couple of years. So, just any context around the thought process of landing on $50 billion. And then, related to that, you have one of the strongest balance sheets in the world. Does the current environment change your thinking at all around M&A opportunities?
Let me answer that, Katy. First of all, on the buyback. As I said, in general, our approach to capital allocation has remained the same for the last several years and it’s not changing now. Keep in mind here, we’re talking about just the authorization, right? And when you look at our actual results at the end of every quarter, you see how much we actually do in terms of share repurchases. The $50 billion is in addition to over $40 billion that is still remaining from the past authorization that we’ve received from our Board, right? So it’s the total available or outstanding in terms of authorization is over $90. And as you look at our run rate during the last several years, you know that that is a very adequate amount. And as you know, we will provide an additional update a year from now. So, nothing really has changed there. And nothing has changed on our approach for M&A. We’ve been quite active over the last several years. We purchase companies on a very regular basis. We’re always looking for ways to accelerate our product roadmaps or fill gaps in our portfolio, both on the hardware side, on the software side, on the services side. So, we will continue to do that. And so, also on the M&A front, nothing has changed.
Thanks, Katy. Can we have the next question, please?
That will come from Amit Daryanani with Evercore.
Thanks for taking my question. I have two as well. I guess, first off on the channel inventory. I was hoping if you could talk about how did channel inventory look like in the March quarter, because it sounds like it may be below the historical ranges. And then, the discussion you had for June quarter performance of iPhones, what are you embedding from a channel building back inventory levels in that expectation.
Amit, it’s Tim. If you look at the iPhone channel inventory during Q2, the reduction of it was more than the reduction from the previous year. It’s not unusual that we reduce in Q2. In fact, if you look back, generally speaking, in the first half of the calendar year, we reduce channel inventories; during the second half of the calendar year, we generally raise channel inventories. That’s a seasonal thing. And sitting here today, I believe that will happen this year as well. So, hopefully, that answers your question. And by the way, we ended in a comfortable position. You could conclude from that that we were within a target range.
That’s really helpful. Maybe just for follow-up. Tim, I was hoping you could maybe talk a little bit about, how do you think about Apple’s manufacturing strategy and perhaps need for some diversity, especially given everything in the Company and everyone has gone through over the last 12 months, how do you think about that? And do you feel comfortable that the supply chain and the manufacturing base is well situated today to launch the traditional fall products that they used to get from Apple?
As you know, our supply chain is global. And so, our products are truly made everywhere. And I would focus on that versus focus on one element of the manufacturing process, which tends to get more visibility, which is the final assembly. We have some final assembly in the United States; we have final assembly in China as well. I think, you’d have to conclude, or at least I conclude that if you look at the shock to the supply chain that took place this quarter, for it to come back up so quickly really demonstrates that it’s durable and resilient. And so, I feel good about where we are. That said, we’re always looking at tweaks. And it’s just not something we talk about, because if we view it as confidential and competitive information. And so, we will look at the — as we get out of this totally, we will look to see what we learned and what we should change.
Thank you, Amit. Can we have the next question, please?
We’ll hear from Jeriel Ong with Deutsche Bank
Hi, guys. Thanks for letting me ask a couple of questions. So, I want to focus my question on Services. The segment was solid in the quarter despite overall macro weakness. I can kind of see the logic behind it being strong despite product weakness overall. As you kind of look at the rest of the year, do you think that sustains or at some point does the macro impacts worldwide impact the Services line?
Jeriel, let me take that one. We typically don’t give a lot of specifics about our categories. But I’ve said, as we look into the June quarter, we see two distinct trends in our services business overall. Our ecosystem is very strong. Our customers are very engaged. We are continuing to grow double digits, the number of transacting accounts and paid accounts. And so, we expect our digital services to continue at the same level of performance that we have seen during the March quarter. And that includes the App Store, of course, our video business, our music business, cloud services. So, we expect all these businesses to continue to grow very strongly.
Given the overall economic environment, the level of demand right now, there are two businesses that we believe are going to be impacted during the June quarter. One of them is AppleCare. AppleCare is essentially comprised of our product repair business and the warranty agreements that we signed with our customers when they purchase our devices. Both these businesses have been affected obviously by the store closures. And not only our retail stores, but also our partners points of sale, and obviously, the reduced level of customer traffic because of the social distancing measures. Droite? And we do expect AppleCare to be affected during the during the June quarter.
The other business, which we think is going to be impacted by the overall economic weakness and the uncertainty on when businesses will reopen is advertising, which is the sum of our advertising business on the App Store, on Apple News, and the third party agreements that we have on the advertising front. So, these are two things that during the June quarter will create a headwind for the Services business.
Je l’ai. I appreciate that. My second question is about the overall purchasing decisions the consumers are making. So far, through April, have you seen increased perhaps downtick across your product line? So for example, somebody might have shift maybe toward the lower end of the storage mix of certain products. And do you expect that going forward, as unemployment uptick and macro impacts kind of layer on through the rest of ‘20? Thank you.
I haven’t seen what you’re asking. No. I have seen a strong customer response to iPhone SE, which is our most affordable iPhone. But it appears that those customers are primarily coming from wanting a smaller form factor with the latest technology, or coming over from it from Android. So, those are the two principal kind of segments versus somebody buying down, as you’re talking about it. We’ve also seen — we launched the iPad Pro in the midst of all of this and the reception there has also been incredibly good. And that’s obviously our top of the line iPad. And so, I’m not seeing what you’re alluding to, at least at this point.
Thanks, Jeriel. Can we have the next question, please.
That will be from JP Morgan’s Samik Chatterjee.
Hi. Thanks for taking my question. If I can just start with a question on kind of what you’re seeing in China. You mentioned going to the pickup in activity. But, is that driven by more kind of footfall in the stores, or what’ve you seen relative to online activity, and how much of this recovery is being driven online? Any thoughts on that, please?
Yes. What we saw in China for the full quarter — and I’ll speak about mainland China because I think that’s the source of your question. We saw strong results in iPad and in Wearables, and in Services. And if you look up underneath the full quarter, we saw a strong January, and then a significantly reduced demand in February as the shelter-in-place orders and the lockdowns went into effect in China and the stores closed. And then, in March, as stores reopened, the recovery began. And then, we’ve seen further recovery in April. Where that goes, we will see. But that’s kind of what we’ve seen so far there.
To your question about store traffic, store traffic is obviously up from where it was in February, but it is not back to where it was pre the lockdown. There has been, however, more move to online. And as I mentioned earlier in my remarks, it’s pretty phenomenal actually. Retail had a quarterly record for us during the quarter. And that’s despite stores being closed for the three-week period around the world. And ex China — and then China was closed prior to that three weeks. And that’s partly because the online store had such a phenomenal quarter, and that included in China, but it was also other regions as well. So, there is definitely a move. And whether that’s a permanent shift, I would hesitate to go that far, because I think people like to be out and about. They just know that now is not the time to do that.
If I can just follow up on your previous comment about the strong demand you’re seeing for iPhone SE. Just given the price point, I’m wondering if you are expecting any change in terms of the geographic mix of where the demand comes from relative to typically what do you see for other iPhones from the line up on, just giving the lower price point?
I think, it plays in every geo, but I would expect to see it doing even better in areas where the median incomes are less. And so, we’ll see how that plays out. And I expect some fair number of people switching over to iOS. So, it’s an unbelievable offer. It’s, if you will, the engine of our top phones in a very affordable package. And I think — and it’s faster than the fastest Android phones. And so, it’s an exceptional value.
Thank you. Can we have the next question, please?
Certainly. Our last question today will be from Chris Caso with Raymond James.
Yes. Thank you. I wanted to follow up with another question on iPhone SE and the decision to bring it back and where it sits within the total iPhone strategy. And I guess, coupled with the fact that iPhone 11, you made the decision to bring that at a lower price point. What does that tell us with respect to your approach to iPhone pricing and flexibility? Is this helping to add users and kind of bring people into the ecosystem? And if so, what does that imply for gross margins?
Chris, we’ve always been about delivering the best product at a good price. And that fundamental strategy has not changed at all. As you know, we did have an SE for a while. It’s great to bring it back. It was a beloved product. And so, I wouldn’t read anything into that other than we want to give people the best deal that we can while making the best product.
D’accord. As a follow-up — the follow-up question is on commodity pricing. And I think, you had expected to see some commodity price declines through the March quarter. If you could talk about what you expect, as you go through the year, perhaps in this new environment, and again, whether that turns into a challenge or a headwind for gross margins as you go into the second half?
Yes. For March, Chris, we saw NAND pricing increase slightly while DRAM and displays and the other commodities declined. For the June quarter, we would expect NAND and DRAM pricing to remain at this historically low level, while displays and most other commodity prices we expect to decline.
Thank you, Chris. 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. The numbers for the telephone replay are 8888-203-1112 or 719-457-0820. Please enter a confirmation code 3229513. These replays will be available by approximately 5 pm Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us.
And that does conclude today’s conference. Thank you all for joining us today.