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This is Tim: Apple Q3 2020 results call transcript

Here’s a complete transcript of Tim Cook and Luca Maestri’s conference call with analysts.

Tim Cook: Good afternoon, everyone. Thanks for joining the call today.

Before we began, I join the many millions across this country in mourning and memorializing, Congressman John Lewis, who was laid to rest earlier today. We’ve lost a hero who walked among us, a leader in the truest sense, who urged this country to aim higher and be better until the very end. I was humbled and fortunate to know him. And as an Alabama native, his example inspires me still. It now falls to every American to be a living memorial to John Lewis and to carry forward the work and the mission that defined his life.

Throughout the call. I’ll speak in greater detail about Apple support for equity and justice, topics of great urgency on a number of fronts. But first I want to pull the lens back to consider the quarter in full.

In an uncertain environment, Apple saw a quarter of historic results, demonstrating the important role our products play in our customers’ lives. We set a June quarter record with revenue of $59.7 billion, up 11% from a year ago. Both products and services set June quarter records and grew double digits, and revenue grew in each of our geographic segments, reflecting the broad base of this success.

As always, and especially in times of real adversity, what makes us proud as a company is not merely what we did, but how we did it. As millions march for justice in big cities and small towns alike, we committed a hundred million dollars to launch Apple’s racial equity and justice initiative, as well as new and renewed internal efforts to foster diversity and inclusion at all levels of the company.

As COVID-19 continues to represent great risks for individuals and great uncertainty for our communities, care and adaptability are defining how we conduct our work, wherever we work. In some places that has met responsibly reopening our operations and retail stores with enhanced health and safety precautions. In others, where the virus has re-emerged, it’s meant taking the challenging but necessary step of reclosing stores.

I’ll touch on these topics more in a little bit, but first I want to offer some more context on the quarter’s results. Due to the uncertain and ongoing impacts of COVID-19, we did not provide our typical guidance when we reported our results last quarter, but we did provide some color on how we expected the June quarter to play out. I’d like to contextualize our results in terms of that color, across each of our product categories.

Beginning with iPhone: Phone revenue grew 2% this quarter. In April, we expected year over year performance to worsen, but we saw better than expected demand in May and June. We attribute this increase in demand to several interactive causes, including a strong iPhone SE launch, continued economic stimulus, and potentially some benefit from shelter in place restrictions lifting around the world.

We expected iPad and Mac growth to accelerate, and we saw very strong double digit growth for these devices this quarter. This remarkable performance came in spite of supply constraints on both products. We’re working hard to get more iPads and Macs into customers’ hands as quickly as possible, recognizing how integral they have become to working and learning from home, providing entertainment, and staying connected with loved ones.

Wearables growth decelerated as we expected, but still grew by strong double digits and set a revenue record for a non holiday quarter. Building on powerful new features built into watchOS 7 and AirPods Pro announced this quarter, we are very excited about the many opportunities in front of us for this product category.

These strong results help drive our install base of active devices to new all time records across each of our product categories. Reflecting the deep integration of hardware, software and services, Services generated a June quarter record of $13.2 billion, up 15% year over year. As we mentioned during our last call, there were two distinct trends we were seeing, and they played out as we thought. First, results for advertising and AppleCare were impacted by the reduced level of economic activity and store closures to a degree that was in line with our expectations. Second, we had strong performance in our digital services with all-time revenue records in the App Store, Apple Music, video, and cloud services, as well as elevated engagement on iMessage, Siri, and FaceTime. Customers are loving new offerings across Apple services like Apple News Today, our new daily audio briefing, and “Greyhound,” our new summer blockbuster starring Tom Hanks. In fact, Apple TV, plus just hit a history making 95 awards nominations and 25 wins and accolades. Based on these results and our performance over the last four quarters, we are proud to announce that we have achieved our goal of doubling our fiscal 2016 Services revenue six months ahead of schedule.

We’re conscious of the fact that these results stand in stark relief during a time of real economic adversity for businesses large and small, and certainly for families. We do not have a zero-sum approach to prosperity, and especially in times like this, we’re focused on growing the pie, making sure our success isn’t just our success and that everything we make, build, or do is geared toward creating opportunities for others.

The App Store is a great example. This quarter, a new study by independent economists at the Analysis Group found that the App Store facilitated more than half a trillion in commerce globally in 2019 alone. Especially in a time of COVID-19, you can measure economic resilience in the ways in which the app store supports remote ordering for restaurants, digital commerce for small businesses, and an enduring entrepreneurial opportunity for creators and visionaries.

Keeping learning vibrant and impactful in the time of COVID-19 is a priority everyone shares. Earlier this month, we announced significant enhancements to the Develop In Swift and Everyone Can Code curricula, and we launched a new professional learning course available exclusively to educators. And just two weeks ago, our community education initiative added 10 more historically black college and university regional coding centers to our roster, bringing the total to 24 locations nationwide, 12 of which are HBCU’s, and 21 of which serve majority Black and Brown student populations.

In Apple’s backyard, we announced that we’re allocating $400 million of our multi-year $2.5 billion affordable housing commitment to new housing construction, home buyer assistance programs, and support for those at greatest risk of experiencing homelessness across Silicon Valley.

Apple’s results this quarter are only possible due to our people, and their ongoing ingenuity, flexibility, resilience, and determination during these ever-changing times. I want to thank our Apple care and retail teams, who have paired exceptional service during a time of intense demand, with great adaptability during a quarter where stores have reopened in some places and reclosed and others. A dedicated team of specialists and experts has shouldered the task of caring for the wellbeing of our teams and communities store by store, location by location, with evidence driven granularity and agility that is unrivaled anywhere.

Innovation from adversity certainly defined this year’s Worldwide Developer’s Conference as well. This is an event where traditionally Apple’s worldwide community of developers gathers together to share, celebrate, and do big things together. Though we could not be together in person, Apple set a new standard for what online events can achieve with our celebrated all-virtual event. The results here speak for themselves: more than 22 million viewers tuned in across all of Apple’s streams. For our developers, we distributed more than 72 hours of video content. That’s three full days of video. The week saw more than 200 direct-to-video engineering and design sessions, and about 4,500 person-to-person appointments with developers across 227 virtual labs. And of course that’s even before you get to this year’s announcements, from iOS 14, which boasts a radical redesign to the home screen, powerful updates to Messages, streamlined and effortless App Clips and even greater privacy, transparency and controls, to major updates to Apple Pencil, Siri, and calling in iPadOS 14, to much anticipated sleep tracking, new fitness and wellness features and unprecedented customization and watchOS 7, to the new macOS Big Sur, boasting the biggest redesign upgrade to MacOS since OS X.

No less important for Apple’s innovation roadmap is our transition to Apple Silicon for the Mac. This two-year effort will achieve both unprecedented performance for the Mac and a common architecture across all Apple products.

Looking forward, we are profoundly optimistic about Apple’s future, and we recognize that with this success comes a real responsibility to lead with our values, because those values help make that success possible in the first place. We are just as proud of our announcement this month that Apple will be fully carbon neutral by 2030 across our entire supply chain, and including the energy use of every device we make, as we are of any hardware innovation—because they spring from the same instinct, to leave the world better than we found it. We’re committed to standing with those marching for their lives and dignity through our new hundred million dollar commitment to Apple’s racial equity and justice initiative. And we’re deepening our diversity and inclusion efforts internally, because our future as a business is inextricably linked with the future of our communities.

There are times when things seem to move slowly. When needed progress, economic or social, seems bogged down. When the instinct to turn away from the horizon and hold on to what you’ve got feels inescapable. And then there are times like this, when people of goodwill step forward, when progress unmoors itself, when the insistence of hope forces something new. This is an immensely challenging moment. COVID-19 is still devastating many places and we have work left to do to care for the health and wellbeing of the communities in which all of us live and work. But no community of people, whether a company or a country, can afford to miss this call when it comes. At Apple, we never have, and we don’t intend to start now.

With that. I’ll hand things off to Luca.

Luca Maestri: Thank you, Tim. Good afternoon, everyone.

Our June quarter was a Testament to Apple’s ability to innovate and execute during challenging times. Our results speak to the resilience of our business and the relevance of our products and services in our customers’ lives.

Total revenue was 59.7 billion, a new June quarter record, up 11% from a year ago, despite a 300 basis point headwind from foreign exchange. Our performance was strong across our entire portfolio as we grew revenue in each of our product categories and set June quarter records for Mac, for wearables and for services. Similarly, our results were very strong all around the world, with growth in all geographic segments and new June quarter records in the Americas, in Europe, in Japan, and rest of Asia Pacific.

Products revenue was 46.5 billion, up 10%, and a June quarter record. iPhone returned to growth. And we saw very strong, double digit growth from iPad, Mac, and Wearables. Lockdowns and point of sale closures were widespread during April and impacted our performance, but we saw demand for all products improved significantly in May and June. As a result of our strong performance and the unmatched loyalty of our customers, our installed base of active devices reach an all time high in all of our geographic segments in all major product categories.

Our services continued to grow strongly, up 15% year over year, and reached a June quarter record of 13.2 billion. We set all time records in many services categories, and June quarter records in each geographic segment. I’ll cover this in more detail later.

Company gross margin was 38%. This was down 40 basis points sequentially, due to unfavorable FX of 90 basis points and a different mix of products, partially offset by cost savings and services mix. Products gross margin was 29.7%, decreasing 60 basis points sequentially, due to FX and a different mix partially offset by cost savings. Services gross margin was 67.2%, up 180 basis points sequentially mainly due to mix. Net income was 11.3 billion, and earnings per share were $2.58, up 18% and a June quarter record. Operating cash flow was also a June quarter record, at 16.3 billion, an improvement of 4.6 billion over a year ago.

Let me get into more detail for each of our revenue categories. iPhone revenue grew 2% to 26.4 billion, with customer demand improving as the quarter progressed. COVID-19 was most impactful during the first three weeks of April, when lockdowns and point of sale closures became more widespread in many countries. We saw marked improvement around the world in May and June, which we attribute to an improved level of customer demand, helped by the very successful launch of iPhone SE and economic stimulus packages. Our active installed base of iPhones again reached an all time high as a result of the loyalty of our customer base and strength of our ecosystem. In fact, in the U.S., the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 98% for iPhone 11, 11 pro and 11 Pro Max combined.

Turning into services. As I said, we had a June quarter record of 13.4 billion of revenue. We had all-time record performance and strong double-digit growth in the App Store, Apple Music, video, and cloud services. Our new services, Apple TV+, Apple Arcade, Apple News Plus, and Apple Card are also contributing to overall services growth, and continue to add users, content and features. At the same time, customer engagement in our ecosystem continues to grow at a fast pace. The number of both transacting and paid accounts on our digital content stores reached a new all-time high during the June quarter, with paid accounts increasing double digits in each of our geographic segments. In aggregate, paid subscriptions grew more than 35 million sequentially, and we now have over 550 million paid subscriptions across the services on our platform, up 130 million from a year ago. With this momentum, we remain confident to reach our increased target of 600 million paid subscriptions before the end of calendar 2020.

Wearables, Home and Accessories established a new June quarter record with revenue of 6.5 billion, up 17% year over year. Our Wearables business is now the size of a Fortune 140 company, and we set June quarter records in the majority of markets we track. Importantly, Apple Watch continues to extend its reach, with over 75% of the customers purchasing Apple Watch during the quarter new to the product.

Next I’d like to talk about the impressive performance of Mac. Revenue was 7.1 billion, up 22% over last year and a June quarter record. We grew double digits in each geographic segment, and set all-time revenue records in Japan and Rest of Asia Pacific, as well as June quarter records in the Americas and Europe. Customer response to our new MacBook Air and MacBook Pro launches has been extremely strong.

iPad performance was equally impressive, with revenue of 6.6 billion, up 31%, and our highest June quarter revenue in eight years. Demand was strong around the world, with double digit growth in each of our geographic segments, including a June quarter record in Greater China. The launch of our new iPad Pro has been received incredibly well in every region of the world.

Both Mac and iPad are extremely relevant products in the new working and learning environments, and the most recent surveys of consumers from 451 Research measured customer satisfaction at 96% for Mac and 97% for iPad. Around half of the customers purchasing Mac and iPad during the quarter were new to that product. And as a result, the active installed base for both products reached a new all time high.

Our retail business had record June quarter revenue, thanks to the performance of our online store. We set records in all geographic segments and grew across all major product categories. In June, we launched Apple Card monthly installments for more products in our U S stores, allowing customers to pay for their devices over time with 0% interest. We’re very pleased with the level of customer interest this new offering has generated.

In the enterprise market, we continue to see companies leverage Apple products and offerings to successfully navigate their businesses through COVID-19. In healthcare, we’re seeing rapid acceleration of tele-health to support a more flexible model of patient care. Many hospitals, such as UVA Health, Rush University Medical Center, and UC San Diego Health, are using apps on iPad and iPhone to help triage, monitor, and care for patients who are at home. This helps free up hospital capacity to support patients who need inpatient care while enabling continued care for patients who do not require in-person visits.

Since many call center employees are currently working remotely, Apple Business Chat has proven an invaluable tool for staying connected with customers. This quarter, HSBC deployed Apple Business Chat in its US and UK connect centers. Apple Business Chat provides a flexible and secure channel for digital banking assistance through a native Apple experience, improving the efficiency and experience for both customers and agents. We are seeing similar adoption by hundreds of other organizations.

Let me now turn to our cash position. We ended the quarter with almost $194 billion in cash plus marketable securities. We issued $8.5 billion of new term debt, retired $7.4 billion of term debt, and increased short term borrowing facilities by $1.1 billion during the quarter, leaving us with total debt of $113 billion. As a result, net cash was 81 billion at the end of the quarter, and we continue on our path to reaching a net cash neutral position over time. We returned over 21 billion to shareholders during the June quarter, including 3.7 billion in dividends and equivalents and 10 billion through open market repurchases of 31.3 million Apple shares. We also began a 6 billion accelerated share repurchase program in May, resulting in the initial delivery and retirement of 15.2 million shares. And finally, we retired an additional 4.8 million shares in the final settlement of our 15th ASR.

As we move ahead into the September quarter, I’d like to provide some color on what we’re seeing, which includes the types of forward looking information referred to at the beginning of the call. Similar to last quarter, given the uncertainty around the world in the near term, we will not be issuing revenue and margin guidance for the coming quarter. However, we will provide some additional insight on our expectations for the September quarter for our product categories.

On iPhone, we expect to see recent performance continue for our current product lineup, including the strong customer response for iPhone SE. In addition, as you know, last year we started selling new iPhone in late September. This year, we project supply to be available a few weeks later. We expect the rest of our products categories to have strong year over year performance. For services, we expect the September quarter to have the same trends that we observed during the June quarter, except for AppleCare, where during the September quarter a year ago, we expanded our distribution significantly. As a consequence, we expect a difficult comp for AppleCare also considering the COVID related point of sale closures this year.

For gross margin, keep in mind that we will have a different mix than in prior years, as I just explained. For OPEX, we expect to be between 9.8 and 9.9 billion. We expect the tax rate to be about 16 and a half percent, and OI&E to be 50 million. Also today our board of directors has declared a cash dividend of 82 cents per share of common stock payable on August 13, 2020, to shareholders of record as of August 10, 2020. And finally, today we’re announcing a four for one split of Apple common stock to make our stock more accessible to a broader base of investors. Each shareholder of record at the close of business on August 24, 2020, will receive three additional shares for every outstanding share held on the record date, and trading will begin on a split-adjusted basis on August 31st, 2020.

With that, that’s open the call to questions.

Katie Huberty, Morgan Stanley: Thank you. Good afternoon. Tim, in light of the economic adversity that you talked about in the prepared remarks, can you just walk us through how Apple’s leveraging finance and trade-in programs to make technology more affordable and accessible during this period, while also addressing the opportunity to recycle and reuse products, and maybe also extend that to how these programs might expand over time.

Tim: Yeah, as, Luca mentioned, in June, we actually rolled out to the overwhelming balance of our other products, the ability to do interest free financing in our stores, with payments. And that’s in addition to trade in, which has becoming more common trend now, which I think is terrific because it is great for the environment and it acts as a subsidy if you will, against the price of the new phone. And so when you compound these two things with the financing and the trade in, it makes the product super affordable. And we’re really happy with what we’re seeing in that regard.

Katie Huberty, Morgan Stanley: And then as a follow up, just specifically to iPhone, the category returned to growth. As you pointed out, the install base is larger today. Our math would suggest that replacement cycles in some cases are elongated. And then you have the affordability element that you just discussed. Does all of that combined to build confidence that we’re entering a longer period of iPhone revenue growth, after what’s been six quarters of decline?

Tim: We were very pleased with how we did on iPhone. It was better than we thought, largely because as we pointed out in the prepared remarks, May and June were much better. If you look at iPhone in totality, the things that get me very optimistic is the size of the active install base, the fact that if you look in the major geographies like the U.S. we had the top two selling smartphones in the UK, we had three of the top four. In Australia, we had five of the top six, in Japan we had the top four, urban China, iPhone 11 was the top selling smartphone in the country. And so these are some very different geographies with very different competitive situations and we’re doing fairly well. The iPhone SE, it’s also clear that from the early data we’re seeing a higher switcher number than we did in the previous year, which we feel very good about. And it also seemed to appeal to some people that were holding onto the device a little longer because they wanted a smaller form factor phone. And so the combination of the smaller form factor and an incredibly affordable price made the iPhone SE very popular. iPhone 11 is still the most popular smartphone, but iPhone SE definitely helped our results. And, as Luca said in his outlook, we do see, that continuing into this quarter currently.

Krish Sankar, Cowen and Company: When you look at the services business and in terms of your TV content production, have the movement restrictions impacted the content production efforts.

Tim: Production has been effected for AppleTV+, as I think it has for most people. We are working to get restarted. I don’t have the precise date yet when we will get restarted, but there will be some impact, because we shut down in the March timeframe and are yet to really restart in a significant way, particularly for those that are shot in the LA area, given the current status of the virus.

Krish Sankar, Cowen and Company: Well, Four years ago you made a big prediction that Services is going to be $60 billion by 2020. I wanted to see if you have any update to the prediction four years down the road.

Tim: We’re not updating today. We feel good. We want to take the moment and feel good about achieving the doubling six months early. And we do have still hanging out there, as you know, the subscription number that we’re shooting for later in the year, at 600 million. So we do have that objective out there.

Krish Sankar, Cowen and Company: For Luca, with a strong from Mac, do you think the back to school season pulled in by a quarter, or do you expect the momentum to still continue?

Luca: As I said when I was talking about providing some commentary for the September quarter, we expect all the non iPhone product categories to have a very strong year over year performance. So we definitely, the back to school season is clearly this one and we’re very excited, not only for the Mac, but also for the iPad. We’ve got a fantastic lineup of products, and we know that these products are incredibly relevant, especially, given the current circumstances. So we expect the performance that we’ve seen for Mac in the June quarter to continue.

Shannon Cross: Tim, can you talk a bit about what you’re seeing in China? I know the revenue was up 2% and I think Luca talked about record iPad, but, just curious as to, given their 5G is a bit ahead how you’re seeing the market play out.

Tim: Yeah, Shannon, we did see growth in greater China for the quarter of 2%. Currency effected China a bit more than in other places. It effected 400 basis points. And so in constant currency, we would have grown at six. As I had mentioned before, the iPhone 11 has been our best selling phone and has been number one in Urban China. And so we’re, we’re very, very proud of that. iPad was helped in the June quarter there by the work from home and distance learning as it was in other geographies. And the Mac also grew strong double digit during the quarter, and services set a new June quarter record there. We also continue to see extremely high new customer rates on Mac and iPad there. To give you a perspective, about three out of four customers that are buying the Mac are new in China and about two out of three that are buying the iPad are new. And so these are numbers that we’re super proud of.

Shannon Cross: Great. Can you talk a little bit more about the decision to bring Mac silicon in house and the benefits that you expect to see, or you’ve seen, from vertical integration of acquisitions like the Intel modem business?

Tim: Yeah. I mean, what we’ll wind up with is a common architecture across all of our products, which, gives us some interesting things that we can do in products, that it sort of unleashes another round of innovation. And so I don’t want to say a lot about it other than we’re extremely excited about it. It’s something that we’ve worked on quite a while to get to this point. And we’re looking forward to shipping the first Mac with Apple Silicon later in the year.

Amit Daryanani, Evercore: Tim, if I think about the strength you’ve seen with iPhones right now, do you have a sense in terms of, where is this trend coming from? Is it more replacement cycles getting shorter, or are we just getting new customers into the iOS ecosystem, because these growth rates seem fairly impressive in the context of a pandemic and the upcoming refresh cycle that we have?

Tim: Amit, I think it’s a combination of a strong launch with iPhone SE, and probably some pickup because of the economic stimulus that hit different countries at different points in time. And probably some of the reopening that took place across the quarter, particularly in may and June, as stores started to reopen. And so it’s a combination of all of those. And as you know, we’ve been having a strong cycle with the iPhone 11 and the 11 Pro. And so when you combine a strong cycle plus an iPhone SE launch, plus the reopening of the stores, et cetera, I think there were a lot of things that were going in the right direction there.

Amit Daryanani, Evercore: Perfect. That’s helpful. And then Luca, if I could just follow up with you, I’d love to get your perspective on how do we think about the overall 38% gross margins? What do you think are the levers to improve this as you go forward? Not really September quarter, but over the next one or two years. And in that context, do you see a point where the product gross margins start to stabilize, because they have been trending somewhat lower for the last couple of quarters now?

Luca: Yeah. Well, let me start with what we seen during the June quarter. We were at 38%, we were down slightly sequentially, but up the same amount on a year over year basis. And really the big negative impact that we’ve felt for several quarters now has been the strength of the U.S. Dollar. So the foreign exchange impact on a sequential basis was 90 basis points, on a year over year basis was 130 basis points. So obviously that is something to keep in mind. And then the other aspect, I think it’s always important to keep in mind, Amit, is that we sell many different products, they have different margin profiles, and so sometimes a different mix can have an impact on the aggregate level of products gross margins, and we’ve been very pleased to see the performance of Mac, iPad and Wearables. But you know, obviously it’s a different mix.

Going forward. The variables are always the same. Foreign exchange will continue to play an impact. The mix of products that we’re going to be selling will have an impact as well. The commodities market has been relatively benign, and we’ll see how that plays out over time. As you know, now for several years, we’ve been managing gross margin, I would say fairly well, in spite of some difficult situations, like the one with the strength of the dollar, and we plan to continue to make good trade off decisions between revenue and units and margins.

Kyle McNealy, Jefferies: Our team in Asia recently, we did some survey work on smartphones in China. It showed that there’s still a high proportion of the installed base that’s on 6, 7, 8 devices. I know you’ve talked about the trade-in programs and promotions that you’ve been doing there. I wonder if you can tell us whether there’s anything else that You’re doing to get these customers into your latest technology? What might those customers be looking for? And how should we think about when an upgrade cycle might come on more strongly there in China?

Tim: Customers upgrade at a different pace. And I don’t have in front of me, the exact installed base data from China, but much like in other geographies, the upgrades have extended some. It extended some during the the depths, if you will, of the pandemic in China and the rest of the world, and probably to some degree is happening still at this point. The key things that we can do is keep innovating, deliver a product that people can’t imagine going through life without, and obviously keep rolling out these programs that make the front end purchase be much less. And this is things like the financing and the trade in programs that you mentioned. And I, I do feel like those are going quite good in a number of geographies.

Kyle McNealy, Jefferies: Congrats again on the strong iPad and Mac results, that’s really impressive. I guess the obvious question is, should we ever think about how much of that might be pulled forward and what might it do to future upgrades in the next two years? Anything else you can share on how you think about growth from here or whether there’s a hangover period, maybe after the back of school season or holiday season, that would be helpful.

Tim: The installed base is growing and the new customer numbers that Luca went over in the aggregate are still very high, in the close to 50% kind of range. And so that to me bodes well for the future. There’s clearly, as we had indicated, there’s some amount of work from home and remote learning that do effect the results of Mac and iPad positively. They probably effect wearables and iPhone the other direction. But on Mac and iPad, these are productivity tools that people are using to stay engaged with their work or stay engaged with their schoolwork. And we believe we’re going to have a strong back to school season. Sitting here today, it certainly looks like that.

Ben Bollin, Cleveland Research: Tim, I was hoping you could share a little bit about where you think channel inventory is. You talked about the tightness you saw exiting the June quarter for Mac and iPad. Interested where you think inventory is across the major product categories.

Tim: You know, we’ve gotten away from talking about channel inventories, but to give you a perspective, sitting here looking at it, on iPhone the inventory is slightly less than it was a year ago. And I’m saying that at a quarter end point, so at the end of Q3, and obviously, iPad and Mac are constrained. And so both of those are less than they were in the year ago quarter.

Ben Bollin, Cleveland Research: Luca, I’m interested, any color you could share about the impact COVID had on OpEx in the quarter? You know, work from home stipends, less travel, other employee support costs, and also how the company is thinking about the longer term opportunity as employees working remotely maybe more permanently, and any consideration in how that can influence future OpEx.

Luca: The OPEX front, there have been obviously certain things that have been effected in terms of cost reductions. Obviously travel is a perfect example. You know, the number of meetings that we have internally, some of those costs have been reduced. We’ve also invested heavily in initiatives, for example, we’re really trying to help during a very difficult circumstance. For example, we have had a program where we match our employee donations. We made donations directly as a company around the world to many institutions and governments. On a net basis, I would say probably the costs have outweighed the savings, both during the March and the June quarter. But we think it’s absolutely the right thing to do. From an employee perspective, what we’ve said so far is that here in the United States, the majority of our population will continue to work from home until the end of the year. And then we’ll see.

I mean, we’ve taken an approach that, you know, we try to understand how the virus is evolving over time. We’ve taken a very cautious approach both with our corporate facilities and with our retail stores. I think what you’ve seen with retail stores is that we have re-reopened in a number of geographies around the world. We reopened here in the United States. We’ve had to re-close some of the stores here in the United States, as the number of cases has gone up, and we will continue to track how the virus is doing. And hopefully at some point we’re going to get to a point where there is a vaccine or there is a cure. And so we’ll make those decisions as we get more information.

Jeriel Ong, Deutsche Bank: I’d like to focus on the gross margin expansion within the Services line. All time record for the quarter. I’m just curious whether you think that will sustain. I understand within Services is a pretty wide range of gross margins by business. And I’m wondering if that should continue to improve.

Luca: As you’ve seen, obviously we’ve had a sequential expansion in gross margin for services. And that was driven primarily by mix. As you said, we have a very broad portfolio. And depending on which one of the services does better will have an impact on services gross margins. We like the services business because it’s a recurring type of revenue. And the margins are accretive to company margin. We did over 67% this quarter. But we want to offer very competitive services across the board, and I think I’m going to make the same comments that I’ve made on products. What matters to us is to be successful with everything that we do and provide great products and services to our customers. So the relative success of our products and services in the marketplace will drive to a certain extent what our margins are. The margins are a byproduct of our success in the marketplace.

Jeriel Ong, Deutsche Bank: I want to ask a question on the Wearables segment. It seems to me that you’re categorizing the wearables business as maybe being a little bit impacted from pandemic, similar to the iPhone. And it’s the first time that Wearables hasn’t materially upsided in at least a while in recent memory. I guess the drivers of wearables being predominantly Watch and AirPods, what are your thoughts going forward on whether there’s a little bit of pent up demand perhaps that might resume as we get back to a more normalized environment?

Tim: I think on the Watch in particular is, like the iPhone, more effected by store closures, because some people want to try on the Watch and see what it looks like, look at different band choices, and those sorts of things. And so I think as stores closed, it puts more pressure on that. We did come out sort of the way we told you last quarter we were going to come out from the color that we gave you. So we knew things would decelerate because of the closures. So we wound up being very pleased with how we did. But the store closures definitely effect the wearables and the iPhone.

Jim Suva, Citigroup: I have two questions. Tim, the coronavirus, your company has done a fantastic job at overcoming all the hurdles. So congratulations to you. As you look forward, say to the Christmas holiday shopping season, and given the economic challenges around the world, coronavirus, and your product launche and things like that. Can you give any commentary, maybe how this Christmas you’re looking forward to seeing maybe some past cycles of Christmas of a lineup, because it just seems like it’s a little bit different, but Apple is really showing a lot more strength coming into this Christmas than maybe some of the past years. And then for Luca, I think you made a quick comment, you mentioned something about a few weeks later, was that for like iPhone, iPhone chips or product launches, or maybe expound upon that? I know things are more difficult, but I didn’t quite catch the commentary that was in your prepared comments about a few weeks late that’s just a quick little blunt.

Tim: Yeah. We take it one quarter at a time. And so we’ll give you a color on the December quarter in October. Generally speaking, I think we need to see a vaccine or a therapeutic or both, and, you know, there’s some optimism around that in that particular timeframe. And so we’ll see, I don’t have any information that isn’t publicly available there. But I think that would boost consumer confidence quite a bit if it began to happen. And I think that any kind of consumer style company would benefit from that.

Luca: And Jim, on the iPhone, I said in my remarks that a year ago, we launched the new iPhone in late September. So Iit was referring to new product. And I said that this year, the supply of the new product will be a few weeks later than that.

Wamsi Mohan, Bank of America: I was wondering if you can maybe comment on the penetration of Apple Card users in the iOS installed base, and have you seen any change in the buying behavior of Apple Card users in terms of accelerating spend on more Apple products and services?

Tim: We saw changes in consumer spending, as the shutdowns occurred and as store closures occurred, we could see that across the card. It effected the categories that you would guess the most like travel and entertainment, et cetera. But overall, if you sort of pull the lens out on the Apple Card, we’re very happy with the number of people that have an Apple Card. We believe based on what we’ve heard, that it’s the fastest rollout in the history of credit cards. And so we feel very good about that.

Wamsi Mohan, Bank of America: And as a followup, now that Apple has Apple silicon for Macs, would you ever consider monetizing this as a merchant silicon vendor, or is this going to be forever for Apple use?

Tim: Well, I don’t want to make a forever comment, but we’re a product company and we love making the whole thing because we can own the user experience in that way, and with a goal of delighting the user. And that’s the reason that we’re doing the Apple silicon, is because we can envision some products that we can achieve with Apple silicon that we couldn’t achieve otherwise. And so that’s how we look at it.

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