Live Blog Apple S Fiscal Year Q3 2016 Earnings Call

Just minutes ago, Apple released its official Q3 2016 earnings and as usual, the earnings release will be followed by a live conference call. Typically, Apple CEO Tim Cook and CFO Luca Maestri give a deeper look into the results, while questions will also be taken from analysts and investors.

In case you missed it, Apple reported $42.4 billion in revenue and $7.8 billion in operating profit. Contributing to those results were sales of 40.3 million iPhones, 9.9 million iPads, and 4.2 million Macs. As usual, Apple did not break out sales of the Apple Watch, which it says is for competitive reasons.

As usual, we’ll have live coverage of Apple’s earnings call in this post. The call will begin at 2PM ET/5PM PT. Tim Cook will likely speak first, followed by Maestri. The Q&A session will round out the call.

Check out all of the details from the call below:

Full coverage of the earnings report is here.
You can listen to the call live on Apple’s investor relations site, but we’ll put all the highlights here.
And we’re off…Tim Cook kicking things off, followed by Maestri, then Q&A
Tim Cook: ‘pleased to report results that represent stronger demand than anticipated,’ numbers near high end of guidance range, sell through greater than sell in thanks to reducing channel inventory; ‘very successful’ launch of the iPhone SE, popular in both ‘developed and emerging customers,’ popular with first-time iPhone buyers, ‘added millions of first time iPhone buyers’
Services up 19 percent, App Store revenue up 37 percent, strong increase from Apple Music, iTunes, and Apple Care; Apple expects Services to be the size of a Fortune 100 company next year
‘Best iPad growth’ in recent time thanks to 9.7-inch iPad Pro launch, half of iPad Pro buyers purchasing for work-related needs
Apple Watch is the ‘best selling’ smartwatch in the world
Cook says Apple remains ‘very optimistic about longtime possibilities in China,’ says recent visit to China reaffirmed this fact; China Mobile says there are more iPhone users on their network than any other brand; ‘to keep things in perspective, accomplishments over recent years are incredible’ despite decrease in revenue
iPhone sales in India up 50 percent YOY, making India fastest-growing market; Apple ‘looks forward’ to opening retail stores in India
Cook says Apple is ‘thrilled’ by reaction to announcements at WWDC, iOS 10 the ‘biggest’ release of iOS yet: ‘the Apple ecosystem is thriving and growing’ and customers have ‘a lot to look forward to’
‘We have focused our AI efforts on areas that best effect the customer experience,’ Cook mentions Siri’s new features in iOS 10 and Mac availability; ‘Also using machine learning in other areas,’ like Photos, Messages, Maps, and Apple Music, all of which is done while ‘protecting user privacy,’ mentions Differential Privacy
Apple Pay monthly users up over 400 percent YOY, 3 million locations in the United States, half of transaction volume coming from non-US markets, 3 out 4 mobile transactions are Apple Pay
Cook ‘bullish on the future, products in the pipeline.’ Luca up now.
Luca Maestri: Recapping earnings report which can be read here.
Reduced channel inventory by 4 million units, making iPhone sell-through down 8 percent YOY; strong iPhone sales in Japan, Turkey, Russia, an other countries
New record for iTunes transactions in Q3, average amount spent per customer higher than ever, App Store continues growth; Services now accounts for 11 percent total revenue (8 percent a year ago)
‘Challenging’ quarter for entire PC industry, ‘very difficult’ compare to year ago quarter due to new products last year, Mac install base at a ‘new all-time high’ as it continues to capture new users
iPad revenue grew 7 percent, ASP up to $419 thanks to launch of iPad Pro, channel inventory down 500k units; corporate buyers at 94 percent satisfaction for iPads
Ended the $231.5 billion in cash, down $1.4 billion YOY, $13 billion returned to investors during the quarter; 3 acquisitions during the quarter, $1 billion investment in Didi Chuxing
Expected: $45.5 47.5 billion in revenue, gross margins of 37.5 and 38 percent, profit around $6 billion
Q&A time…
Q: Tim’s thoughts on acquisitions and investments, such as Carpool Karaoke and Didi?
Cook: Apple invests in itself for areas like R&D, but constantly looking on the outside for great talent and intellectual property, buying a company every 3-4 weeks; Didi investment ‘unusual’ because Apple rarely invests in companies, Apple sees it as a great financial investment with good strategic opportunities, Apple will learn a lot about the business and Chinese market; Apple will do more investments, but won’t be constant
Q: Thoughts on earnings guidance, which is on the higher end; affected by iPhone timeline?
Cook: Won’t get into product and product transitions; strong growth in various countries part of the high guidance reasoning, as is growing switcher rate
Q: Talk about the growing Apple ecosystem and decision to open up Messages & Siri
Cook: The best experience for users includes apps, Apple wants to do everything it can to continue building App Store and developers, focus big on discoverability right now; trying to provide users a seamless experience
Q: Speak on expected upgrade rate this coming quarter?
Cook: Won’t talk about new phones that aren’t announced, upgrade rates for the 6s similar to the 5s, iPhone 6 upgrade rate significantly higher than that, very optimistic about the future because of install base, switcher rate, smartphone becoming more instrumental and important to people’s lives; AI helping smartphone become more essential; SE opening the door to previously unreached customers
Q: Expecting drawdown in channel inventory during Q4?
Maestri: All products saw channel inventory reduction during Q3, not just iPhone; for September quarter, channel inventory expected to be inline with the past, but won’t provide guidance as usual; macroeconomic environments slowing around the world
Q: Upgrade cycle comments? Is Apple thinking about ways to sell more products on subscription basis?
Cook: Apple has business success in emerging markets, really optimistic with switcher rates; as smartphone becomes more essential at home, in the car, and in work, people will put more focus on what they are buying and the experience provided; deployment of AI is something Apple will excel at because of focus on customer experience; as of today, more people already on upgrade cycle plans than before; overall for Apple, very optimistic for upgrade rates
Q: Talk about China and banned iBooks and Movies services, competition form other companies
Cook: For the months iBooks and Movies were active in China, revenue was less than $1 million, but Apple wants to provide the service to customers and is working closely with government officials; Apple’s market share tends to peak during release cycles, confident Apple will do well in China
Q: Does Apple Pay contribute to Services revenue?
Cook: Apple Pay is very much about providing a great feature to customers, revenue is very little
Q: Thoughts on Pokemon Go?
Cook: Incredible testament to the App Store and the ability for a developer to offer an app with the press of a button; shows that AR can be really great and Apple sees great opportunities for it; Apple is going high on AR
Q: Speak on R&D spending.
Cook: Apple continues to invest significantly in research and development, quite a bit of investment in products and product categories that are not currently shipping
Q: Will the iPhone SE cannibalize the rest of the lineup?
Maestri: Limited experience because it just came out, but Apple believes SE doing exactly what as intended; getting new customers to pick the iPhone and higher rate of previous iPhone owners who prefer 4-inch form factor; always some level of cannibalization
Q: Future of Apple TV, tvOS, and on-demand video?
Cook: Apple TV building the foundation for what can be a broader business over time, shouldn’t look at what’s available today as everything Apple wants to do, but the foundation has been laid