Apple just reported its Q1 2019 earnings (calendar Q4 2018), its first release without disclosing unit sales data. The company reported revenue of $84.3 billion, with profit of $19.97 billion. Read our full coverage of the release here.

Next up is the company’s quarterly earnings call with Apple CEO Tim Cook, CFO Luca Maestri, and investors.

In Apple’s press release for its Q1 2019 earnings, Tim Cook said it was “disappointing” to miss guidance, but the long-term future is bright:

Head below for our full coverage of the earnings call, which kicks off at 2PM PT/5PM ET. Tim Cook will begin things with a broad look at Apple’s results, with Luca Maestri then offering a closer look at the numbers. The call with wrap up with a Q&A session with investors and analysts.

Tim Cook:

  • “As you know our December revenue was below expectations, down 5 percent from a year ago, or down 3 percent adjusting for foreign exchange.”
  • Revenue in Greater China down 4.8 billion dollars YOY, with declines across iPhones, iPads, and Macs
  • Business grew outside of China, new records in the Americas, Europe, and others
  • Record earnings in US, Canada, Mexico, Germany, Italy, Spain, and Korea
  • Record Services in greater China, very strong wearables performance with revenues up over 50 percent, more than 2/3 of Mac and iPad buyers in China during the quarter were first-time buyers
  • “We see great upside in continuing to focus on the things we can control”
  • “We couldn’t be more proud of our iPhone lineup and our industry-leading customer satisfaction.”
  • Outside of iPhone, business grew 19 percent. Several factors affected iPhone: foreign exchange, the strength of USD, lack of subsidies in certain countries
  • “For millions of customers, we made it cheap and efficient to help customers hold onto their iPhones a bit. Some people have suggested we shouldn’t have done this because of the impact on upgrades, but we strongly believe it was the right thing to do.”
  • 1.8 billion Apple Pay transactions in the quarter, a record quarter for App Store Apple Pay, Cloud Services, and App Store Search Ads
  • Record quarter for Mac, revenue up 9 percent thanks to new Mac mini and MacBook Air
  • Wearables, Home, and Accessories up 33 percent combined, wearables alone up 50 percent
  • “We don’t manage Apple for 90-day increments. We manage Apple for the longer-term: highly satisfied and loyal customers, large active installed base, and culture of innovation.”
  • “We’ve embedded machine learning directly into the chip with the A12 Bionic, processing data and transactions directly on the device, allowing iPhone to learn and keep information private.”
  • “Beginning last week, we started making it easier for people to pay for products over time, and we intend to roll this out to additional markets over time.”
  • “We are as confident as ever in the fundamental strength of our business, and we have an exciting pipeline with announcements coming later this year.”

Luca Maestri:

  • Starting with an overview of numbers
  • iPhone revenue down 15 percent, other revenue up 19 percent
  • First time reporting Services growth margin: 16 percent
  • All-time record EPS of $4.18 during Q1 2019
  • iPhone revenue of $52 billion, most of the decline due to Greater China and other emerging markets
  • Global active install base of iPhones surpassed 900 million devices, up YOY in all five geographic segments, up 75 million in last 12 months
  • Services up 19 percent year-over-year, on track to double 2016 Services revenue by 2020
  • All-time high of transacting accounts on digital stores, 360 million paid subscriptions across Services portfolio. Forecasting 500m+ paid subscriptions in 2019
  • 30,000 third-party subscription apps on App Store, largest accounting for only 0.03 percent
  • Mac revenue up 9 percent, all-time high active installed base
  • iPad revenue up 17 percent YOY
  • Wearbles business approaching size of Fortune 200 company
  • Retail stores doubled the volume of iPhones traded-in over last year due to trade-in campaign
  • Growing reliance on Apple devices in the enterprise, Luca says

Q&A:

  • Q: Services revenue did decelerate during the quarter, what factors played into that?

  • Maestri: On track to meet goal of doubling Services revenue from 2016 to 2020. Very little of Services revenue is driven by what we sell in the last 90 days. All of our services are growing strongly; Apple Music, Apple Pay, App Store. Adding 120M subscriptions on a YOY basis.

  • “We’re also looking to launch new services going forward that we believe will be of value to our users.”

  • Three factors affecting Services: Foreign exchange, 60 percent of Services outside of US. The second factor is a well-known issue in App Store in China related to approval of new game titles. Thirdly, deceleration in AppleCare.

  • Q: Share repurchases were lower in December quarter compared to June and September. What’s the run rate going forward?

  • Maestri: Very committed to executing the program in an efficient and disciplined manner.

  • Q: Some had the perception iPhone prices were too high. What have you learned about price elasticity?

  • Cook: We priced the iPhone XS the same as iPhone X a year ago. The XS Max was a $100 more, and we priced the XR right in the middle of the iPhone 8 and iPhone 8 Plus. It’s actually a pretty small difference compared to last year.

  • Foreign exchange amplified that issue in emerging markets. What we have done in January in some locations and some products is absorb part or all of the foreign currency move as compared to last year. Therefore, get close to the local price of a year ago. Yes, I do think that price is a factor. I think part of it is the foreign exchange, the subsidy is probably the bigger issue in developed markets.

  • Q: Color on Q2 2019 guidence and channel inventory?

  • Maestri: As we always do, when we provide range, it’s a range we believe we’ll fall within. We’ve done well with that up until the December quarter. There isn’t a level of conservatism. On channel inventory, our historical pattern is that we increase inventory in Q1, decrease in Q2. This year will be similar, we’ve exited the December quarter with comfortable inventory levels. Our iPhone performance was down 15 percent in Q1, we expect factors affecting Q1 will also affect Q2.

  • We expect revenue will continue to grow from the rest of the business.

  • Q: Any details on iPhone upgrade cycles?

  • Cook: We do design our products to last as long as possible. Some people hold on for life of the product, some trade them in. That phone is then redistributed to someone else. The upgrade cycle has extended, there’s no doubt about that. We’ve said several times that the upgrades for the quarter were less than we anticipated due to the reasons we mentioned. Where it goes in the future, I don’t know. I’m convinced making a great product that’s high quality is best for the consumer.

  • Q: What’s driving Services? Will it be volatile depending on quarters?

  • Maestri: Services gross margins increase YOY basis by a significant amount. Sequentially, we increased 170 basis point. it’s a business that’s growing nicely so we get good support from our scale. We tend to expand gross margins there. As you probably know, we have a broad portfolio of Services.

  • Q: Tim, can you talk about video? How do you view the opportunity?

  • Cook: We see huge changes in customer behavior taking place now and we think it will accelerate as the year goes by, to the breakdown of the cable bundle. I think it will likely take place at a much faster pace this year. We’re going to participate in that in a variety of ways. Apple TV, AirPlay 2 with support for a number of third-party TVs. Another way is all of the third-party video services on the App Store, and I anticipate that will accelerate as the bundle breaks down.

  • Finally, original content. We will participate in the original content world. Today, I’m not ready to extend that conversation beyond that point. We’ve hired some great people and we’ll have more to say on that later.

  • Maestri: On track to meet goal of doubling Services revenue from 2016 to 2020. Very little of Services revenue is driven by what we sell in the last 90 days. All of our services are growing strongly; Apple Music, Apple Pay, App Store. Adding 120M subscriptions on a YOY basis.

  • “We’re also looking to launch new services going forward that we believe will be of value to our users.”

  • Three factors affecting Services: Foreign exchange, 60 percent of Services outside of US. The second factor is a well-known issue in App Store in China related to approval of new game titles. Thirdly, deceleration in AppleCare.

  • Maestri: Very committed to executing the program in an efficient and disciplined manner.

  • Cook: We priced the iPhone XS the same as iPhone X a year ago. The XS Max was a $100 more, and we priced the XR right in the middle of the iPhone 8 and iPhone 8 Plus. It’s actually a pretty small difference compared to last year.

  • Foreign exchange amplified that issue in emerging markets. What we have done in January in some locations and some products is absorb part or all of the foreign currency move as compared to last year. Therefore, get close to the local price of a year ago. Yes, I do think that price is a factor. I think part of it is the foreign exchange, the subsidy is probably the bigger issue in developed markets.

  • Maestri: As we always do, when we provide range, it’s a range we believe we’ll fall within. We’ve done well with that up until the December quarter. There isn’t a level of conservatism. On channel inventory, our historical pattern is that we increase inventory in Q1, decrease in Q2. This year will be similar, we’ve exited the December quarter with comfortable inventory levels. Our iPhone performance was down 15 percent in Q1, we expect factors affecting Q1 will also affect Q2.

  • We expect revenue will continue to grow from the rest of the business.

  • Cook: We do design our products to last as long as possible. Some people hold on for life of the product, some trade them in. That phone is then redistributed to someone else. The upgrade cycle has extended, there’s no doubt about that. We’ve said several times that the upgrades for the quarter were less than we anticipated due to the reasons we mentioned. Where it goes in the future, I don’t know. I’m convinced making a great product that’s high quality is best for the consumer.

  • Maestri: Services gross margins increase YOY basis by a significant amount. Sequentially, we increased 170 basis point. it’s a business that’s growing nicely so we get good support from our scale. We tend to expand gross margins there. As you probably know, we have a broad portfolio of Services.

  • Cook: We see huge changes in customer behavior taking place now and we think it will accelerate as the year goes by, to the breakdown of the cable bundle. I think it will likely take place at a much faster pace this year. We’re going to participate in that in a variety of ways. Apple TV, AirPlay 2 with support for a number of third-party TVs. Another way is all of the third-party video services on the App Store, and I anticipate that will accelerate as the bundle breaks down.

  • Finally, original content. We will participate in the original content world. Today, I’m not ready to extend that conversation beyond that point. We’ve hired some great people and we’ll have more to say on that later.