Apple FY 3Q16 Earnings Call Notes

Apple (AAPL) Timothy Donald Cook on Q3 2016 Results

Sell through greater than sell in

“Revenue of $42.4 billion was near the high end of our guidance range and gross margin of 38% was at the top of our guidance range. We achieved these results while reducing channel inventory by about $3.6 billion, significantly more than the $2 billion inventory reduction we had expected. So our sell-through was markedly greater than our sell-in.”

iPad grew 7%

“We had our best iPad compare in 10 quarters, with revenue growing 7% thanks to the rollout of the 9.7-inch iPad Pro. We’re proud to have the most exciting lineup of tablets and accessories in the world and exceptionally high customer satisfaction and engagement. Our surveys also show that about half of iPad Pro purchases are buying them for work.”

New watchOS coming in the fall

“Apple Watch continues to be the best-selling smartwatch in the world. And just this month, J.D. Power ranked it highest in customer satisfaction among all smartwatches. With watchOS 3 coming this fall, customers will be able to update their Apple Watches with an enhanced user interface, significantly improved performance and all-new fitness and health capabilities, including activity sharing.”

China’s economic environment has slowed since the beginning of the year

“We face some challenges in Greater China, as the economic environment has slowed down since the beginning of the year. This is reflected in consumer confidence and retail spending, and the Chinese yuan has depreciated by 7% relative to the U.S. dollar since August of last year. Hong Kong’s tourism and retail businesses also continue to be significantly impacted by the stronger Hong Kong dollar relative to other Asian currencies.”

Using machine learning

“We’re also using machine learning in many other ways across our products and services, including recommending songs, apps, and news. Machine learning is improving facial and image recognition in photos, predicting word choice while typing in messages and mail, and providing context awareness in maps for better directions. Deep learning within our products even enables them to recognize usage patterns and improve their own battery life.

Developing ways to deliver AI processing on cloud without compromising privacy

And most importantly, we deliver these intelligent services while protecting users’ privacy. Most of the AI processing takes place on the device rather than being sent to the cloud. And starting this fall, we’ll be using sophisticated technology called differential privacy, enhancing our ability to deliver the kinds of services we dream of and customers love without compromising on the individual privacy our customers have come to expect from us.”

Rationale for Didi investment

“From a Didi point of view, we see that as, one, a great financial investment. Two, we think that there are some strategic things that the companies can do together over time. And three, we think that we’ll learn a lot about the business and the Chinese market even beyond what we currently know, and Didi has an incredible team there”

Very optimistic about the future since smartphone becoming even more instrumental to people’s lives

“I’m very optimistic about the future because I see so many signs that are positive. I see an installed base that has gotten incredibly large. I see a switcher rate that is the highest ever. I see the smartphone itself, led by iPhone, becoming even more instrumental and important to people’s lives. It’s becoming essential”

Smartphone penetration is still only 42%

“The iPhone demand is made up, as you know, of upgraders, switchers and new to smartphone. And so if you take it in reverse order for a minute and look at a new smartphone, smartphone penetration right now around the world at the end of December was 42%. And so there’s quite a bit of room there. It is true that a lot of those are in emerging markets, but we have done – we’ve had reasonable business success in several emerging markets. And so we don’t enter into those with no experience, although we will enter into them humbly.”

Luca Maestri – Chief Financial Officer & Senior Vice President

We do know that the macro environment is slowing down in a number of places

” As you know, we do not provide guidance for channel inventory. But I would say, in general, I think it’s important to keep in mind that if we look around the world, we do see a lot of positive signs, but we also know that the macroeconomic environment is slowing down in a number of places around the world. And that needs to be taken into account in our guidance.”