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Apple, Inc. (NASDAQ: AAPL) Second Quarter 2019 Earnings Conference Call, April 30, 2019, 5 pm ET
Company participants
Nancy Paxton – Senior Director, Investor Relations
Tim Cook – Chief Executive Officer
Luca Maestri – Chief Financial Officer
Participants in the teleconference
Shannon Cross – Cross Research
Samik Chatterjee – JPMorgan
Katy Huberty – Morgan Stanley
Jim Suva – Citi
Wamsi Mohan – Merrill Lynch from Bank of America
Mike Olson – Piper Jaffray
Louis Miscioscia – Daiwa Capital Markets
Operator
Hello and welcome to the conference call of the results of the second quarter of the year 2019 of Apple Incorporated. The call of today is being recorded.
For the moment, for opening remarks and presentations, I would like to give the floor to Nancy Paxton, Senior Director, Investor Relations. Please go ahead.
Nancy Paxton
Thank you. Good afternoon and thank you all for your presence today. Apple CEO Tim Cook is the first to speak. and he will be followed by CFO, Luca Maestri. We will then go to the questions of the analysts.
Please note that some of the information you will hear during our discussion today will be forward-looking statements, including those regarding products, gross margin, operating expenses, other products and services. charges, taxes, capital allocation and future business prospects. . Actual results or trends may differ materially from our expectations.
For more information, please refer to the risk factors described in Apple's latest periodic reports on Form 10-K and Form 10-Q, and Form 8-K filed with the SEC. today, as well as in the corresponding press release. Apple assumes no obligation to update forward-looking statements or information, which are valid as of the date of publication.
I would now like to give Tim the floor for his opening remarks.
Tim Cook
Thank you Nancy. Good afternoon and thank you all for your presence today. This quarter has been exciting and productive for Apple. In my letter to investors in early January, I wrote that one of Apple's great strengths is our culture of flexibility, adaptability and creativity. This quarter was marked by important announcements that demonstrate the strength of our commitment to innovation and long-term thinking. I'd like to start with a few highlights, then go into more detail with you.
I will start with the financial results. Our revenues were $ 58 billion, in the upper range of our forecasts. We consider this result as a positive result given the continuing difficulties due to the weakening of currencies against the US dollar. In constant currency, our revenues would have been 200 basis points higher than our published results.
We have achieved excellent results in many areas of our business. This is the best quarter of our history for services, with revenues of $ 11.5 billion. We recorded a successful quarter for the iPad, with revenues up 22% over last year. This is our highest iPad revenue growth rate in six years. And it was another sensational quarter for Wearables with growth close to 50%. This company is now about the size of a Fortune 200 company and is a staggering statistic considering that it is only four years since we delivered the first ever Apple Watch. I will talk about these categories later.
Although we have grown year-to-year in the developed markets and recorded record results for the month of March in a number of major markets, including the United States, Canada, the United Kingdom and the United States. United Kingdom and Japan, we have seen a decline in emerging market products. But we are optimistic about our trajectory. Our sales in Greater China grew year-on-year relative to December and we saw a very positive response from our customers to the price measures we took in this market. , our take-back programs and financing in our retail stores, the effects of measures taken by governments to stimulate the economy and improved trade dialogue between the United States and China.
The results of our App Store still reflect the impact of the slowdown in regulatory approval in gaming applications in China, but we are encouraged by the recent increase in the pace of approvals. We firmly believe in our long-term opportunity in China, thanks to our robust ecosystem, our talented developer community and the nation's growing population of technology-savvy consumers who value the best products and services. For the iPhone, while our global revenues decreased by 17% compared to the previous year, the declines were much smaller in the last weeks of March.
If we look at the last five months, November and December were the most difficult, so this is an encouraging trend. We love the direction we are taking with the iPhone and our goal is now to accelerate the pace. Importantly, our active installed base of peripherals continues to grow in each of our geographic areas and sets a new all-time record for all major product categories. This growing installed base reflects the satisfaction and loyalty of our customers and propels our Services business to new heights.
In fact, we recorded our best quarter ever for the App Store, Apple Music Cloud Services and our App Store research activity, and we set new revenue records for the quarter March of AppleCare and Apple Pay. Apple Pay transaction volume has more than doubled in a year and we are reaching 10 billion transactions this calendar year. Apple Pay is now available in 30 markets and is expected to be operational in 40 markets by the end of the year. More and more transit systems are accepting Apple Pay and the New York MTA system will begin deployment early in the summer.
As we have seen in cities like London, Tokyo and Shanghai, the contactless entry into the transit systems helps to encourage wider adoption of Apple Pay and we believe that this will further spur more people to use Apple Pay in the United States. And Ticketmaster has just announced that they will accept Apple Pay for ticket purchases on the web and through the Ticketmaster app. And more than 50 of their entertainment venues and sporting events are launching contactless tickets this year, including the vast majority of NFL stadiums.
Subscriptions are a powerful driver of our Services business. We reached a new high with more than 390 million paid subscriptions at the end of March, an increase of 30 million last quarter. This quarter was also extremely important for the advancement of our services. In March, we presented a set of new services that changed the game, each based on fundamentally Apple principles. They are easy to use. They present unparalleled attention to detail. They give priority to the privacy and security of users. They are carefully selected, personalized and ready to be shared by all members of your family.
These features are not just nice to have. In fact, they help eliminate the line between hardware, software and service, creating a singularly exceptional experience for our users. First, building on the tremendous momentum of Apple News, which is already the number one press app in the United States and the United Kingdom, we launched Apple News +. It will bring together more than 30 popular magazines, major newspapers and digital publishers in a wonderful, convenient and organized experience within the Apple News app.
Apple News + relies on our commitment to support quality journalism from trusted sources, while offering the best magazine and news reading experience for mobile devices. Advancing our vision of replacing the portfolio, we announced that Apple Card was based on Apple principles, such as transparency, simplicity and confidentiality. Apple Card is integrated with the Wallet application and offers all the new experiences that only Apple can integrate by integrating our hardware, software and services into an elegant solution that places the customer at the center of its concerns. This is the first card to encourage you to pay less interest, eliminate fees and give you daily cash on all your purchases. The interest of customers has been great so far.
We've also previewed Apple Arcade, the world's first desktop-based mobile game subscription service. With more than 100 new games, no ads, no ads, no additional purchases, and with the privacy of users, we have created a service for gamers of all ages, from kids to teens, adults and kids. families. The App Store is already the largest gaming platform in the world and we believe that Apple Arcade is a great way to unleash the creativity of the gaming community through a collection of new games that are only available on any other mobile platform or any other subscription service. We can not wait for our customers to experience it this fall.
We were thrilled to take a look at what's new on TV. Beginning in mid-May, the all-new Apple TV app will bring together different ways to discover and watch shows, movies, sports news and more on iPhone, iPad, Apple TV, Mac, smart TVs and devices. streaming. And users can subscribe and watch new Apple TV channels such as HBO Showtime and Starz only paying for the services they want, all on-demand services being available online and offline. And this fall, Apple TV + will be the new home of the world's most creative storytellers, with exclusive original shows, movies and documentaries.
We also had several major product launches during the quarter. We launched a new, more powerful iMac with dramatic increases in compute and graphics performance, making it an excellent upgrade for consumers and professionals alike. For all of our Mac businesses, we had to deal with some processing constraints in March, resulting in a 5% decrease in revenues compared to the previous year. But we believe that our Mac revenue would have been up from last year without these constraints, and we do not believe this challenge will have a significant impact on our third quarter results.
For iPad, we were very excited to return to growth in Greater China while generating strong double-digit growth in each of our other geographic segments. Our excellent results on iPad were mainly motivated by the strong reaction of our customers to iPad Pro. Towards the end of the quarter, we launched an all-new, ultra-thin, Apple Pencil-compatible, high-end iPad Air design, powered by Apple's A12 Bionic chip.
In addition, we launched a new iPad mini, a major upgrade for iPad fans who love ultra-portable design and who loves the new iPad Air, which offers the power of the A12 Bionic and support for Apple Pencil. Last month we introduced the new AirPods, the world's second-generation wireless headphones, and the demand has been incredible. This is nothing less than a cultural phenomenon.
With the new H1 chip designed by Apple, the new AirPods offer faster connection times, more talk time and the convenience of Hey Siri hands-free. Our retail and online stores continue to be a key element of innovation. As we mentioned in January, we are working on an initiative to facilitate the exchange of our phone in our store, to finance the purchase over time and to obtain the same. help to transfer data from the old phone to the new phone. .
As part of this initiative, we launched new recovery and financing programs in the United States, China, the United Kingdom, Spain, Italy and Australia. The results had been striking. In all our stores, we recorded a record response to our take-back programs, with a recovery volume more than four times higher than in March of the previous year.
Each quarter, we are more inspired by the impact of our products on people's health and fitness. This quarter, we have marketed the ECG application on Apple Watch Series 4 in Hong Kong and in 19 European countries, including France, Germany, Italy, Spain and the Kingdom. -United.
Just as when the ECG application was launched in the United States, virtually no day goes by without either a customer from one of these countries, nor a letter, nor an e-mail explaining to him how this feature had radically changed their lives. We believe that we are just beginning to build on what we can do to help our users actively manage their health and well-being.
For example, last month, Stanford Medicine reported on the results of the Apple Heart Study, the largest study ever of its kind, which recruited more than 400,000 participants from all 50 states in the space of only eight months. And hundreds of institutions now support health records on iPhone with recent additions, including Michigan Medicine and UT Health Austin.
In February, we announced our collaboration with the US Department of Veterans Affairs to make iPhone health records available to veterans. This will be the first such record-sharing platform available for the VA, the largest medical system in the United States, serving more than nine million veterans in more than 1,200 institutions. .
Apple's innovation goes beyond the impact we have in the lives of our customers and the impact we have on the world around us. We recently celebrated Earth Day with several major announcements about our efforts to get the world out better than we found it. We finalized the $ 2.5 billion allocation of our green bonds in 40 environmental initiatives worldwide, ranging from solar power generation to water conservation, passing through through the development of custom alloys for our products made from 100% recycled aluminum.
We announced a major expansion of our recycling programs, including quadrupling the number of sites, where US customers can send their iPhones to disassemble through our recycling robot, Daisy. Each daisy can now disassemble 1.2 million appliances a year, which recycles recovered materials back into the manufacturing process. And we collaborated with a record number of our suppliers to follow our example and move to 100% clean energy. With the help of these 44 suppliers, we will surpass our goal of introducing four gigawatts of renewable energy into our supply chain by 2020, with more than one. additional gigawatt projected in this time frame.
In the last calendar year, only the partners that have joined this effort have generated enough clean energy to power more than 600,000 homes in the United States. We are very proud of the progress made by our partners and ourselves and hope that our actions will inspire other companies to do everything in their power to protect the world we share.
We are as excited as ever for our tremendous portfolio of hardware, software and services and look forward to sharing more information on the future of our four software platforms at our Global Developer Conference in less than five weeks. Everyone here is working hard to prepare for WWDC, and it's always a privilege to be able to share the future of our platforms with the community of developers who are changing the world and who gives it life. You will not want to miss this one.
We are in a unique position to generate more cash than we need to manage our business and invest with confidence in our future. That's why we're announcing today the latest update to our capital return program, including an increase in our share buyback and quarterly publication. dividend.
For more details on this and our results in March, I give the floor to Luca.
Luca Maestri
Thank you, Tim Good afternoon everyone. Revenues for the March quarter were $ 58 billion, almost the high end of the 90-day forecast, down 5% from last year. . The decline in our revenues reflects a negative currency effect of 200 basis points, attributable to the strength of the US dollar. Overall, product revenue decreased by 9%, mainly due to the iPhone, while service revenues increased by 16%, a new record.
We also set a new March record for Wearables Home and Accessories, and recorded our best growth rate of the iPad in six years. The gross margin of the company is 37.6%, according to our forecasts. Gross margin was 31.2%, down approximately 310 basis points, due to the seasonal loss of leverage and exchange rate headwinds.
Services gross margin was 63.8%, up 100 basis points sequentially, due to a different mix and leverage from higher revenues. Net income was $ 11.6 billion. Diluted earnings per share were $ 2.46 and cash flow was $ 11.2 billion.
Let me give more color to our different income categories. The iPhone's revenue was $ 31.1 billion. We are seeing a positive response from customers to recent price action in some emerging markets, as well as improvements to our take back and financing programs. And our year-over-year performance improved over our December quarter results in Greater China, the Americas and Japan.
Our active iPhone installed base reached an unprecedented new high at the end of March. This expanding installed base reflects the satisfaction and loyalty of our customers, leaders in the sector. The latest survey of US consumers among 451 Research shows a 99% customer satisfaction rate for the iPhone XR, XS and XS Max combined. And of the professional buyers who plan to buy a smartphone in the June quarter, 81% plan to buy an iPhone.
Moving on to services. As Tim said, we recorded a $ 11.5 billion business figure, an increase of 16% over last year. We generated double-digit sales growth on the App Store, Apple Music, Cloud Services, AppleCare, Apple Pay and our search-related advertising activity in the App Store. And we set service revenue records in four of our five geographic areas. We are very happy with this performance. As you can see in our new disclosures, services accounted for 20% of our revenue for the March quarter and about one-third of our gross profit.
Customer engagement in our ecosystem continues to grow. The number of accounts in transaction on our digital content stores reached a new all-time high in the quarter with the number of pay accounts, also setting a new historical record and recording strong double-digit growth over the previous year. last year. And we now have over 390 million paid subscriptions in our service portfolio, an increase of $ 120 million from 12 months ago. All subscription categories are experiencing double-digit growth, and as we mentioned a quarter ago, we expect the number of paid subscriptions to exceed $ 0.5 billion in 2020.
On the App Store, our subscription business is extremely diverse and is growing strongly around the world. In fact, the number of third-party paid subscriptions increased by over 40% over last year in each of our geographic areas. And among all third-party subscription applications, the largest accounted for only 0.3% of our total service business revenue.
Then I would like to talk about the Mac. Revenues were $ 5.5 billion, up from $ 5.8 billion a year ago, mainly because of the strain on processors in some popular models. Despite this challenge, we generated double – digit Mac business revenue growth in Japan and Korea, setting new Mac business turnover records of all time in both markets. Globally, nearly half of customers buying Macs during the quarter were new to Mac, and the installed base of Mac assets reached an unprecedented new high.
We have achieved excellent results for the iPad, with a business turnover of $ 4.9 billion and accelerated growth compared to the month of December, reaching 22%. IPad revenues increased in our five geographic segments, with a return to growth in Greater China and strong double-digit growth in all other sectors. We recorded our best March quarter so far for iPad in Japan, and we were particularly pleased with the results in Korea, Thailand and Mexico, where revenues more than doubled compared to last year.
In total, more than half of iPad customers in the March quarter were new, and the iPad active installed base also reached a new high.
The revenue growth of the iPad has been mainly fueled by the positive response of our customers to our new iPad Pros. These completely redesigned iPads with Liquid Retina Full Screen, Face ID, the powerful A12X Bionic chip with Neural Engine, and support for new Apple Pencil and Smart Keyboard pencils make the iPad Pro the perfect replacement for notebooks for home users. and professionals.
The most recent surveys of 451 Research have measured an overall customer satisfaction rate of 93% for the iPad. Of those customers who plan to buy tablets, 77% of consumers and 75% of companies plan to buy iPads.
Wearables Home and Accessories' revenue set a new record of $ 5.1 billion for the March quarter, driven primarily by the strong performance of our Wearables business, which grew by almost 50%. In this category, Apple Watch is the world's best-selling and most popular smart watch and has produced its best ever results for a holiday quarter. Three-quarters of purchases are for customers who have never owned an Apple watch before. The interest in the AirPods has not been taken into account and we are working hard to meet the incredible demand of our customers.
Let's move on to our retail stores and online. We generated very strong double-digit revenue growth with Apple Watch and iPad. We also announced 50 new Today at Apple sessions this quarter in three new extended formats, Skills, Walks and Labs, for free in our stores around the world. We are making significant progress in the business market, helping to transform key industries. We rely on Apple's leading position in key functional areas to expand our reach and share it across key accounts.
Aviation is a good example of this strategy at work. On more than 450 airlines, the iPad is the preferred solution for the pilot's electronic flight bag. We have made great strides in expanding Apple's footprint beyond the cockpit, right into the cabin, where more than half of the 50 largest airlines have now implemented iOS to improve the quality of life. 39 customer experience and enable a new case of use with mobile point of sale. .
We are also seeing traction with other critical air features in ground operations and in-flight maintenance. For example, one of the largest airlines in the world tells us that the adoption of the iPad has halved maintenance times. Apple services are also making their way, including the growing adoption of Apple Pay for food and beverage purchases and flight access to Apple Music.
We also see a strong traction on iOS with large enterprise platforms, which are the face of complex back-end systems for tens of millions of employees around the world. The experience of end-user employees is essential for engagement and productivity and, with the increasing mobility of today's modern workforce, these experiences are optimal. for native iOS applications.
We are seeing great momentum with the growing number of iOS SDKs provided by the world's largest enterprise platforms. For example, the SAP SDK for iOS continues to grow in popularity with its customers, with growth of more than 40% in the last six months. And in the last quarter, Salesforce released its SDK allowing developers to create native iOS apps directly on the Salesforce platform.
Finally, our business networks continue to gain momentum. In February, our Apple at Work initiative was launched with AT & T. This extension of our ongoing collaboration with AT & T will enable more customers to choose the best Apple products for their business needs and modernize their products. activities. AT & T will enable commercial services for Apple products to help businesses in their IT strategy, including device management, security, productivity and collaboration.
Let me now talk about our cash position. We ended the quarter with $ 225 billion in cash, plus marketable securities. We also had $ 101 billion in term debt and $ 12 billion in commercial paper outstanding, with net cash close to $ 113 billion.
As a result, we are in a very strong position to invest with confidence in all areas of the business, while continuing to deliver value to our shareholders. Last year, we announced our commitment to contribute more than $ 350 billion to the US economy over the next five years, including the creation of 20,000 jobs.
Plus récemment, nous avons annoncé une expansion majeure à Austin, au Texas, et dans d'autres villes du pays. Tous ces efforts sont des investissements essentiels pour nous assurer que nous intégrons des idées novatrices et les meilleurs talents, où qu’ils se présentent.
En mettant en œuvre ces initiatives, nous sommes également en mesure de restituer plus de 27 milliards de dollars aux investisseurs au cours du trimestre de mars. Nous avons lancé un programme de rachat d’actions accéléré de 12 milliards de dollars en février, qui a permis la livraison initiale et le départ à la retraite de 55,1 millions d’actions. Nous avons également racheté 71,7 millions d'actions Apple pour une valeur de 12 milliards de dollars dans le cadre d'opérations sur le marché libre, et nous avons versé 3,4 milliards de dollars en dividendes et équivalents.
Nos priorités en matière de trésorerie n'ont pas changé au fil des ans. Plus important encore, nous voulons toujours conserver les liquidités dont nous avons besoin pour gérer notre entreprise, maintenir une flexibilité stratégique et investir dans notre avenir. Nous sommes en voie d'atteindre les prévisions d'investissement établies au début de l'année dernière. Nous souhaitons également œuvrer à une structure de capital plus optimale et, comme nous l’avons déjà dit, notre objectif est d’atteindre une position de trésorerie nette neutre au fil du temps.
Compte tenu de notre confiance en l'avenir d'Apple et de la valeur de nos actions, notre conseil d'administration a autorisé l'affectation de 75 milliards USD de plus à des rachats d'actions. Et comme nous savons que beaucoup de nos investisseurs apprécient le revenu, nous augmentons notre dividende trimestriel pour la septième fois en moins de sept ans à 0,77 $, soit une augmentation d'environ 5% par rapport au montant précédent.
Au cours des quatre derniers trimestres, nous avons versé plus de 14 milliards de dollars en dividendes et équivalents, ce qui en fait l'un des plus gros payeurs de dividendes au monde. À l'avenir, nous continuons de planifier des augmentations annuelles du dividende par action.
Alors que nous avançons dans le trimestre de juin, j'aimerais passer en revue nos perspectives, qui incluent les types d'informations prospectives mentionnées par Nancy au début de l'appel. Nous nous attendons à des revenus compris entre 52,5 et 54,5 milliards de dollars. Cette fourchette comprend 300 points de base d’impact négatif des taux de change sur 12 mois. Rappelons également qu'au cours du trimestre de juin de l'année dernière, nos produits des services comprenaient un élément non récurrent favorable de 236 millions de dollars lié au règlement final de diverses actions en justice.
Nous prévoyons une marge brute comprise entre 37% et 38%. Nous prévoyons que les dépenses d’exploitation se situeront entre 8,7 et 8,8 milliards de dollars. Nous nous attendons à environ 250 millions de dollars d’IO & E et à un taux d’imposition d’environ 16,5%. Reflétant également l'augmentation approuvée, notre conseil d'administration a déclaré aujourd'hui un dividende en espèces de 0,77 $ par action ordinaire, payable le 16 mai 2019 aux actionnaires inscrits au 15 mai 2019.
Sur ce, je voudrais ouvrir l’appel aux questions.
Nancy Paxton
Merci Luca Et nous vous demandons de vous limiter à deux questions. Opérateur, pouvons-nous poser la première question, s'il vous plaît?
Séance de questions et réponses
Opérateur
Certainement. Notre première question viendra de Shannon Cross avec Cross Research.
Shannon Cross
Merci beaucoup d'avoir pris ma question. Tim, peux-tu parler un peu plus de ce que tu vois en Chine? Clairement, il semble que les choses s’améliorent de manière séquentielle. Vous avez également mentionné que les dernières semaines du trimestre se stabilisaient sur les marchés émergents, je crois. Alors, que disent les clients là-bas? Que disent vos partenaires en Chine? Et puis j'ai un suivi.
Tim Cook
Yeah. Merci pour la question, Shannon. Nous constatons – dans l'espace iPhone, une meilleure performance d'une année à l'autre au cours des dernières semaines du trimestre par rapport au trimestre complet ou aux mois de novembre et décembre, ce qui était en quelque sorte – le creux. Je pense qu'il y a une série de raisons à cela.
Premièrement, nous avons procédé à des ajustements de prix, essentiellement en atténuant l’effet de change plus faible, puis en partie. Le gouvernement a mis en place des programmes de relance, notamment au début d'avril, avec une réduction de la TVA de 16% à 13%. Ils ont donc été agressifs du côté des stimulants.
Troisièmement, les programmes de reprise et de financement que nous avons mis en place dans nos magasins de détail ont été très bien reçus dans ce pays et je suis satisfait des résultats obtenus à ce jour. Et puis, il y a un dialogue commercial amélioré entre les États-Unis et la Chine. Et de notre point de vue, cela a eu un impact positif sur la confiance des consommateurs sur le terrain. Et donc, je pense que c'est un ensemble de toutes ces choses, et nous nous sentons certainement beaucoup mieux qu'il y a 90 jours.
Shannon Cross
Awesome. Thank you. Et puis, je suis sûr que vous vous attendez probablement à une question sur le règlement Qualcomm. Alors, que voudriez-vous dire sur ce règlement? Comment envisagez-vous l'avenir de vos fournisseurs de composants? Et comment devrions-nous penser à cela en ce qui concerne – je ne connais pas vos plans de développement pour l’avenir? Parce que je suis sûr que vous n'allez pas parler du moment où vous allez faire de la 5G, mais il est clair que cela aide ce chemin. Thank you.
Tim Cook
Yeah. Merci Shannon. Nous sommes heureux de laisser le litige derrière nous, et tous les litiges dans le monde ont été classés et réglés. Nous sommes très heureux d'avoir un contrat d'approvisionnement pluriannuel. Et nous sommes heureux d'avoir conclu un accord de licence directe avec Qualcomm, ce qui était, je le sais, important pour les deux sociétés. Nous sommes donc satisfaits de la résolution.
Nancy Paxton
Merci Shannon. Pouvons-nous avoir la prochaine question, s'il vous plaît?
Opérateur
La prochaine question viendra de Samik Chatterjee avec JPMorgan.
Samik Chatterjee
Salut. Merci d'avoir pris la question. Tim, vous avez dit que la Chine avait bien réagi aux mesures de prix que vous avez prises sur ce marché. Est-ce que l'un ou l'autre de ces apprentissages se répercute sur la manière dont vous déterminez les prix dans les marchés émergents restants, tels que l'Inde et ainsi de suite, pour vous préparer au prochain cycle de produit?
Tim Cook
Nous avons fait quelques ajustements en Inde et nous avons déjà obtenu de meilleurs résultats dans ce pays. Tout ce que nous faisons conseille tout ce que nous faisons à l'avenir, nous essayons donc d'apprendre le mieux possible et d'intégrer cela à notre réflexion. Et nous allons évidemment le faire avec cela aussi.
Samik Chatterjee
Thank you. Je viens d'avoir un suivi rapide pour Luca du côté des services. Luca, nous voyons que vous vous dirigez vers des dépenses d’exploitation plus élevées chaque trimestre. Quelle part de cette augmentation va au soutien des nouveaux services que vous envisagez de lancer plus tard dans l'année?
Luca Maestri
Yeah. Bien entendu, nous soutenons à la fois nos activités de produits et services et vous pouvez voir la trajectoire de notre OpEx au cours des différents trimestres. Clairement, à mesure que nous ajouterons de nouveaux services, nous devrons faire les investissements nécessaires pour les prendre en charge.
Notre entreprise de services est – a plusieurs flux. Au total, cela augmente les marges brutes de l'entreprise. Vous avez vu les dernières nouvelles – nous avons des marges de services supérieures à 60%. C'est donc une activité très importante pour nous à bien des égards pour notre écosystème et pour notre capacité à le monétiser. Nous ferons donc clairement tous les investissements nécessaires pour garantir le succès des nouveaux services. Et nous sommes vraiment encouragés par le niveau de réponse des clients que nous avons reçu jusqu’à présent pour le lancement de ces services.
Nancy Paxton
Merci, Samik. Nous avons la prochaine question s'il vous plaît.
Opérateur
The next question will come from Katy Huberty with Morgan Stanley.
Katy Huberty
Thank you. Luca if I look back over the past five years, June quarter revenue typically declines about 15% from the March quarter. You're guiding to an 8% drop this year. So can you just talk about, which regions or product segments you think can outperform that typical seasonality?
Luca Maestri
Yes, Katy. And keep in mind by the way we are reporting this guidance including a 300 basis point negative impact from foreign exchange, so actually in constant currency the numbers would be even stronger.
At the product category level we expect that we continue to have strong revenue growth from the non-iPhone categories as we've had for the first half of our fiscal year. We're also expecting a relative improvement in our iPhone performance on a year-over-year basis in Q3 versus the first half.
As Tim said March was the strongest month of the quarter on a year-over-year basis and so this has given the confidence to provide the guidance that you've seen. Geographically, of course, as you've seen from our results for the March quarter, China is the geo where we found some challenges, but we believe the trajectory should improve over time.
Katy Huberty
Thank you. And then just as a follow-up, Shannon said you're not going to talk specifics around the timing of the 5G phone, but Tim maybe you can talk about how the company approaches a new technology like this given the higher cost but also potentially significant benefit, how you think about the right timing for coming to market with a product, with those characteristics? And then just generally how meaningful you think 5G is as a demand driver for upgrades in your iPhone installed base? Thank you.
Tim Cook
Katy, this is one that I'm going to largely punt on as you would probably guess. We look at a lot of things on the different technologies and try to look at the — and select the right time that things come together and get those into products as soon as we can. And the — certainly from a cost point of view there has been — the technologies have had cost pressure over the last couple of years or so.
On the flip side of that there's a number of things in the commodity markets going in the other direction at the moment like DRAM and NAND. And so it's difficult to project what happens next, but it's the aggregate of all of it that really matters from a price point of view.
Nancy Paxton
Thank you, Katy. So we have the next question, please.
Operator
Jim Suva from Citi has our next question.
Jim Suva
Thank you very much. A topic that's probably split or shared by both Tim and Luca on a response, but I'll ask the question and you can decide how to divide it up.
In your opening remarks, Tim, you'd mentioned about pricing adjustments that you made in some of the markets and then Luca talked also about the strength of the trade-in program or maybe it was Tim also. Can you help us understand about what type of lessons or elasticity you've learned about pricing and the trade-in programs of how it impacts like revenues and COGS and margins and things? Thank you.
Tim Cook
Yeah. Jim, in the opening remarks I was really talking about China specifically. And I mentioned four things that I believe are responsible for the better year-over-year performance in the Q2 relative to Q1 and also the final weeks of March being better than the Q2 average. And those four are the price reductions, but that's one of them. But there are three others and one of the others is the trade-in and financing programs that we instituted in our retail stores.
Clearly, what we've learned here and it's not a surprise really is that the — many, many people do want to trade-in their current phone. It does — from a customer user point of view the trade-in looks like a subsidy, and so it is a way to offset the device cost itself. And many people in literally every market that we've tried this in, there is a reasonable number of people that want to take and pay for something on installments instead of all at once. And so, it's a little different in each market in terms of what the elasticity is, but you can bet that we're learning quickly on all of those.
The other two items that are not insignificant in China that I don't want to lose here is that the stimulus programs, I believe, are having an effect on the consumer. And the one that I got much visibility in — that happened in early April was the VAT reduction from 16% to 13%, so it's a very aggressive move. But there are other stimulus programs as well that likely have an effect to the consumer level.
And then finally — and this is not to be under weighted either — I think the improved trade dialogue between the countries affects consumer confidence in a positive way. And so, I think it's sort of the sum of all of those things.
Luca Maestri
And Jim, if I may add on the gross margin level as we look at pricing actions, of course, anytime you do a pricing action it is gross margin percentage diluted. But what really matters to us and what we look at — when we look at the elasticity of these programs is to see the impact on our gross margin dollars. And what — the experience that we've had in a few of these emerging markets has been positive in that respect and so that's what we think matters the most really.
Jim Suva
Thank you so much, gentlemen.
Nancy Paxton
Thank you, Jim. We have the next question, please.
Operator
The next question will come from Wamsi Mohan with Bank of America Merrill Lynch.
Wamsi Mohan
Hi. Yes. Thank you. Tim, you shared a lot of color around trade-ins, but I was also hoping maybe you can characterize what sort of dynamics you're seeing across your installed base on these trade-ins. What type of devices are being traded in? Is the profile of someone who has a really old iPhone? Or are you seeing folks that have newer iPhones trading in? And what sort of incentives are you providing beyond sort of the financing to drive that? And do you see this as something that can accelerate replacement cycles here over the next year or so? And I have a follow-up.
Tim Cook
We're — actually the product that's being traded in is all over the place, to be honest. It's 6, 6 Plus, 6S, 6S Plus, 7, 7 Plus and then fewer 8 and 8 Plus. But there's some of each of those and so you get customers that are on the two-year cycle and customers — some customers on the one-year cycle and then customers as well on the three and four-year cycles. And so it's really all over the place.
In terms of the incentives we're offering currently in our retail stores a trade-in value that has — that is more than the sort of the blue book of the device if you will for lack of a better description. And so we have topped those up to provide an extra benefit to the user.
The installments are different in each geography. I would say that at the moment the geography that is doing the best in installments would be China. And we have a bit of a unique offering there I think versus the — versus what you can get in the regular market and so that probably further helps there. And so you can bet that we're learning on each of these finding the parts that the user likes the most.
I think the key is we're trying to build a — build something into the consumer mindset that it's good for the environment and good for them to trade in their current device on a new device. And we do our best of getting the current device to someone else that can use that or in some cases if the product is at an end of life we are recycling the parts on it to make sure that it can carry on in another form.
Wamsi Mohan
Thanks for the color Tim. And as my follow-up Luca can you just clarify if the settlement with Qualcomm is creating either a headwind or a tailwind to your gross margins in the near-term? And does your guidance contemplate incremental pricing actions that could be creating some gross margin headwinds? Thank you.
Luca Maestri
As Tim has explained we've reach this comprehensive agreement with Qualcomm. As part of this we have agreed that we're not going to share the financial terms of the agreement, so we plan to honor that. What you see in our gross margin guidance for the June quarter we guided 37% to 38% fully comprehends the outcome of the agreement with Qualcomm.
Nancy Paxton
Thank you, Wamsi. Could we have the next question please?
Operator
Mike Olson from Piper Jaffray has our next question.
Mike Olson
Thanks for taking my question. So, you have more than 1.4 billion active devices and at your event you announced services that leverage that installed base. And you have obviously a remarkable position with kind of this Trojan horse of devices out in so many households.
So, I guess, the question is and I know some of these services aren't even live yet but should we expect a continuation of the building out of new services categories like what we saw at the March event? Is there a pipeline of new services in the works? Or have we kind of seen what we're likely to see on that front for the near to intermediate term? And then I have a follow-up.
Tim Cook
Yes, I wouldn't want to get into announcing things on the call, but obviously, we're always working on new things. And — but we're right now we're really focused on getting these four out there. We have the News+ in the market today. We'll have the Apple Arcade and the Apple TV+ products in the market in the fall and Apple Card will go out in the summer timeframe. And so we've got lots in front of us and we're very excited about getting these out there.
Mike Olson
Right. And then you mentioned the App Store search ad business a couple of times in the prepared remarks. Is that reaching a point where it's become material and maybe moving the needle for overall services revenue? Or is there anything you can quantify related to that? I also imagine that this is a high-margin business at least maybe higher than the overall Services margin but wondering if you can confirm if that's the case or not. Thank you.
Tim Cook
It's growing very, very fast Mike. I think it was up around 70% over the previous year. We're expanding into new geographies as well and we still have more geographies out there that we think can move the dial further. So, it is a — it's definitely a business that is big and getting bigger.
A – Nancy Paxton
Thank you, Mike. Can we have the next question, please?
Operator
Our next question comes from Louis Miscioscia with Daiwa Capital Markets.
Q – Louis Miscioscia
Okay and thank you for taking my question. Tim, when you look at the four things that you have announced. And I realize they have different dates when they're coming out but, which ones would you say over the next 12 months has the most potential to help your Services line? And then maybe, which one has the best long-term potential? And then, I have a quick follow-up.
A – Tim Cook
We're going to wait until we get these things out. And what I can tell you right now is that the — we're taking sort of consumer interest on the Apple Card and there's been a significant level of interest on that and we're excited. As you know the — gaming is the top category on the App Store.
And so the Apple Arcade will serve some of that market. And it serves it with a different kind of game, which we think will be great for developers and great for users. The TV+ product plays in a market where it's — there's a huge move from the cable bundle to over the top.
We think that most users are going to get multiple over-the-top products. And we're going to do our best to convince them that the Apple TV+ product should be one of them.
And then, we're working very hard to get everyone to give Apple News+ a look. Because we think it's a very unique product. And I love magazines. And we have really wanted to support the publishers.
And so, we're working very hard to — at the — but at the very beginning of the ramp there. We wouldn't do a service…
Q – Louis Miscioscia
Okay, great.
A – Tim Cook
…that we didn't think could be meaningful. So that's sort of the way I look at it.
Q – Louis Miscioscia
Awesome.
A – Tim Cook
Yeah, these aren't hobbies.
Q – Louis Miscioscia
Okay. A quick follow-up on India, obviously market share there is well below China. I believe you're looking to start manufacturing there. But what's the — obviously the potential could be huge but the market already seems to be pretty dominated on the Android side, so maybe if you could just talk about trying to really aggressively ramp up share there. Thank you.
A – Tim Cook
I think India is a very important market in the long-term. It's a challenging market in the short-term. But we're learning a lot. We have started manufacturing there which is very important to be able to serve the market in a reasonable way. And we're growing that capability there.
And we would like to place retail stores there. And we're working with the government to seek approval to do that. And so, we plan on going in there with sort of all of our might.
We've opened a developer, accelerator there, which we're very happy with some of the things coming out of there. It's a long-term play. It's not something that's going to be on overnight huge business. But I think the growth potential is phenomenal.
It doesn't bother me that it's primarily Android business at the moment because that just means there's a lot of opportunity there.
Nancy Paxton
Thank you, Lou. 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. And the numbers to the telephone replay are 888-203-1112 or 719-457-0820.
Please enter confirmation code 7060604. And these replays will be available by approximately 5:00 PM Pacific Time today.
Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. And financial analysts can contact Matt Blake or me with additional questions. Matt is at 408-974-7406, and I'm at 408-974-5420. And thanks again for joining us.
Operator
That does conclude our conference for today. Thank you for your participation.
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