Earnings Call: Q2 2020

Apr 30, 2020

Good day, everyone. Welcome to the Apple Incorporated Second Quarter Fiscal Year 2020 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Tejas Kala, Senior Manager, Corporate Finance and Investor Relations. Please go ahead. Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-nineteen on the company's business and results of operations. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed periodic reports on Form 10 ks and Form 10Q and the Form 8 ks filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Thanks, Tejas. Good afternoon, everyone. Thanks for joining us today. I hope you're staying safe and well. Today, Apple reports $58,300,000,000 in revenue, an all time record for services and a quarterly record for wearables, home and accessories. It was also a quarterly revenue record for Apple Retail, powered by phenomenal growth in our online store. Amid the most challenging global environment in which we've ever operated our business, we're proud to say that Apple grew during the quarter. But before we dive more deeply into the numbers, I want to speak just for a bit on COVID-nineteen. This is something Apple has been contending with since January, and I think that how we have responded, what we have been inspired to do tells an important story about Apple's great durability as a business and the enduring importance of our products and our customers' lives. It also speaks to Apple's unmatched capacity to be creative, to think always in terms of the long term and to forge ahead when others may feel an instinct to pull back. Before COVID-nineteen was on the horizon, we anticipated that Q2 was going to be a prolific and energetic period for Apple. And when the pandemic did strike, our teams not only succeeded in growing the business, in introducing powerful new products and in meeting our customers' needs, but they also rose to the occasion in terms of meeting our broader obligations to the communities in which we live and work. Let's look quickly across the business. At the same time that they were leaving no stone unturned to get our latest generation devices manufactured into our customers' hands, our worldwide network of supply chain partners, logistics and operations folks in every part of the company were also sourcing more than 30,000,000 masks for frontline medical workers, ensuring they are donated to places of greatest need in every region around the world. While our product teams were preparing to launch a new iPad Pro, Magic Keyboard, MacBook Air and the new iPhone SE, all of which have been very well received by reviewers and consumers alike, they were also working with our suppliers to design, test, manufacture and distribute more than 7,500,000 face shields and we continue to ship more than 1,000,000 of these every week to the doctors, nurses and medical personnel on the front lines. In a quarter where our services teams achieved strong growth, which Luca will dig into in a minute and which speaks to the real durability of our services strategy, these teams were also putting COVID-nineteen front and center. As Apple News reached 125,000,000 monthly active users, we elevated trusted information from reliable sources through a special COVID-nineteen vertical. We let customers skip payments without incurring interest on Apple Card for March April in light of financial hardship for many families. We worked with everyone from Oprah to Lady Gaga to inform, entertain and give back through Apple TV. And services like FaceTime and Messages set new all time records for daily volume during this quarter as users relied on their devices to stay connected in a new reality. In software, at the same time that our teams work with great creativity and excitement as we prepare to deliver our first ever all online worldwide developers conference later this quarter. They also worked with the same creativity and speed to put together our COVID-nineteen symptom checking website and app in partnership with the CDC. As of today, the app has been installed nearly 2,000,000 times and the web tool has received over 3,000,000 unique visits. And just this month, to accelerate contact tracing, we are launching a joint effort with Google to enable the use of Bluetooth technology to help governments and health agencies spread the reduce the spread of the virus with user privacy and security central to the design. We've paired these programmatic efforts with a broader strategy to get back where it's needed most. We've made major corporate donations to response efforts around the world to support Global Citizen as well as a new fund for Americans experiencing food insecurity as a result of the crisis. When you tally these things up and consider our ongoing 2 to 1 match for employee donations, Apple's contributions to the global response are significant, diverse and a great source of pride for the whole team. We're also doing what we can to help our employees, their families and by extension their communities stay safe and well by modifying our operations where appropriate. This extends, of course, to our retail employees. They are Apple Space to our customers and an instrumental part of our business, and we're compensating them normally despite store closures. During a quarter where circumstances evolved by the hour, we have been gratified by the resilience and adaptability of our global supply chain. While we felt some temporary supply constraints in February, our operations team, suppliers and manufacturing partners have been safely returning to work and production was back at typical levels toward the end of March. At this time of social distance, of shuttered schools and gathering places, of delayed plans and new ways of socializing, we have seen significant evidence that our products have taken a renewed importance for our customers. Teachers and students around the world are relying on our technology to teach, learn and stay connected with each other. We are in the process of deploying major orders of iPads to school systems working to keep learning going strong at a distance, including tens of thousands in Ontario, Canada, Glasgow, Scotland and Puerto Rico, 100,000 to the City of Los Angeles and 350,000 to New York City, our largest educational iPad deployment ever. Since early March, we've seen unprecedented demand for our pro apps from students, enthusiasts and creative professionals. These folks are keeping us all entertained and inspired as we stay at home and to help them do it, we made Final Cut Pro X and Logic Pro X available for free for 90 days for everyone. And the reaction has been overwhelming, driving software downloads and usage to record levels. And doctors and medical professionals are making even greater use of Apple Watch and other health features to communicate with patients and to treat them safely from a distance when necessary. With new FDA guidance on non invasive remote patient monitoring, for example, the ECG app on Apple Watch is increasingly being used to facilitate remote ECG measurements and recordings for telemedicine usage, reducing patient and healthcare provider contact and exposure. Many hospitals such as Geisinger Health System, NYU Langone Health and Stanford Healthcare are using apps on iPad and iPhone to support communication and video conferences between hospitalized patients and their care teams. This enables the care teams to keep a close watch on patients without entering isolation rooms, which helps to minimize exposure and reduces some of the need for personal protective equipment. Now when you step back and tally all this up, when you consider all the ways COVID-nineteen has touched Apple, our customers and the way we work, This may not have been the quarter it could have been absent this pandemic, but I don't think I can recall a quarter where I've been prouder of what we do or how we do it. As I said at the outset, we achieved revenue of $58,300,000,000 and underneath that was product revenue of $45,000,000,000 The performance of our product business had 3 very different phases during the March quarter. Based on Apple's performance during the 1st 5 weeks of the quarter, we were confident we were headed toward a record second quarter at the very high end of our expectations. In the next 5 weeks of the quarter, as COVID-nineteen started impacting China, iPhone supply was temporarily affected as well as demand for our products within China. This caused us to withdraw our revenue guidance in February. At that point, demand for our products outside of China was still strong and in line with our expectations. During the last 3 weeks of the quarter, as the virus spread globally and social distancing measures were put in place worldwide, including the closure of all our retail stores outside of Greater China on March 13th and many channel partner points of sales around the world, we saw downward pressure on demand, particularly for iPhone and wearables. Given the lack of visibility and certainty in the near term, we will not be issuing guidance for the coming quarter. Over the long term, though, we have a high degree of confidence in the enduring strength of our business. Our global supply chain is profoundly durable and resilient. We have shown the consistent ability to meet and manage temporary supply challenges like those caused by COVID-nineteen. We have continued to deliver innovative new products across multiple categories that appeal to a broad cross section of customers, including the all new iPhone SE, which achieved unmatched technological capacity at an incredible value. Our teams worldwide have tackled the complexities of this moment with unmatched creativity, good humor and dedication to our customers. For a company whose business is innovation, there are real upsides in periodically having to figure out how to do just about everything in a brand new way. Our long running investment in our services strategy is succeeding. This business is growing and is a reflection of our enduring, large and growing installed base, we expect to meet our long standing goal of doubling our fiscal 2016 services revenue in 2020. We have always run Apple for the long term. We entered this period with unmatched financial strength, a robust cash position and our best product pipeline ever. Major investments, including our 5 year commitment to contribute $350,000,000,000 to the economy here in the United States, are moving forward full speed ahead. It's in these moments that we set ourselves apart. We've always managed through difficult moments by doubling down and investing in the next generation of innovation, and that's our strategy today. And so while we can't say for sure how many chapters are in this book, we can have confidence that the ending will be a good one. Apple will continue to do everything we can do to help the global response and to keep our customers learning, creating, sharing and connecting so that life can remain as normal as it can during this challenging time. With that, I'll hand things off to Luca. Thank you, Tim. Good afternoon, everyone. It has been a very different quarter than we were expecting when we last talked to you at the end of January, but we could not be more proud of our Apple teams around the world, our role in supporting local communities and our partners throughout the value chain and how resilient our business and financial performance has been during these challenging times. So the revenue for the quarter was $58,300,000,000 up 1% from a year ago despite the extreme circumstances from the impact of COVID-nineteen and a headwind of 100 basis points from foreign exchange. Products revenue was $45,000,000,000 down 3%. After a very strong January, our performance was impacted particularly during the last 3 weeks of the quarter when lockdowns and point of sale closures increased due to COVID-nineteen spreading around the world and affected our product sales. However, on a demand basis, our performance was stronger than our reported results as we reduced iPhone channel inventory more than we did a year ago. Importantly, our installed base of active devices reached an all time high in all of our geographic segments and all major product categories. Services revenue followed a different trend with very strong year over year growth of 17%. We set a new all time revenue record of $13,300,000,000 with all time records in many of our services categories and in most countries we track. I'll provide more details on this later. Company gross margin was 38.4%, flat sequentially with cost savings and mixed shift towards services offset by the seasonal loss of leverage. Products gross margin was 30.3%, decreasing 380 basis points sequentially due to loss of leverage and unfavorable mix. This drop was more pronounced than under normal circumstances due to the COVID-nineteen impact I mentioned earlier. Services gross margin was 65.4%, up 100 basis points sequentially driven by favorable mix. Our reported tax rate for the quarter was 14.4%. This was lower than our 16.5% guidance due to onetime discrete items. Net income was $11,200,000,000 and earnings per share were $2.55 up 4%. Operating cash flow was very strong at $13,300,000,000 an improvement of $2,200,000,000 over a year ago. Let me get into more detail for each of our revenue categories. IPhone revenue of $29,000,000,000 declined 7% year over year as both iPhone supply and demand were affected by the impact of COVID-nineteen at some point during the quarter. On the supply side, we suffered from some temporary supply shortages during February, but we've been extremely pleased with the resilience and adaptability of our global supply chain as well as its ability to get people back to work safely when circumstances allow. Our operations team and manufacturing partners put forth an extraordinary effort to restore production quickly and we exited the quarter in a good supply position for most of our product lines. On the demand side, after a very strong first 5 weeks, we saw the impact of COVID-nineteen affect demand in China for the next 5 weeks and then more broadly around the world for the last 3 weeks of the quarter, while lockdowns and point of sale closures became more widespread in many countries. While we did see a slight elongation in our replacement cycle towards the end of the quarter, which we attribute to the widespread point of sale closures, our active installed base of iPhones has reached an all time high. This speaks to the quality of our products and strength of our ecosystem. In fact, in the U. S, the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 99% for iPhone 11, 11 Pro and 11 Pro Max combined. Turning to services. We set an all time revenue record of $13,300,000,000 We had strong performance across the board with all time revenue records in the App Store, Apple Music, Video, Cloud Services and our App Store search ad business. And we also set a March quarter record for AppleCare. Our new services, Apple TV plus Apple Arcade, Apple News plus and Apple Card continue to add users, content and features while contributing to overall services growth. As Tim mentioned, we are well on our way to accomplishing our goal of doubling our fiscal 'sixteen services revenue during 2020. App Store revenue grew by strong double digits, thanks to robust customer demand for both in app purchases and subscriptions. Our 3rd party subscription business grew across multiple categories and increased over 30% year over year, reaching a new all time high. Our first party subscription services also continued to perform very well. Apple Music and Cloud Services both set all time revenue records, and Apple Care set a March quarter record. Paid subscriptions for all three of these services were up strong double digits. Customer engagement in our ecosystem continues to grow strongly and the number of both transacting and paid accounts on our digital content stores reached a new all time high during the March quarter. In particular, the number of paid accounts increased double digits in all of our geographic segments. We now have over 515,000,000 paid subscriptions across the services on our platform, up 125,000,000 from a year ago. On a sequential basis, paid subscriptions grew by over 35,000,000. This is the highest sequential growth we have ever experienced. With this momentum, we are confident we will reach our increased target of 600,000,000 paid subscriptions before the end of calendar 2020. Wearables, home and accessories established a new March quarter record with revenue of $6,300,000,000 up 23% year over year with strong double digit performance across all five geographic segments. Our wearables business is now the size of a Fortune 140 company, and we're very excited by the many opportunities in front of us for this product category. For example, Apple Watch continues to extend its reach as over 75% of the customers purchasing Apple Watch around the world during the quarter were new to the product. Next, I'd like to talk about Mac and iPad. Mac revenue was $5,400,000,000 iPad revenue was $4,400,000,000 Towards the end of the quarter, we launched a brand new iPad Pro that includes a 1st in class LiDAR scanner with some really exciting augmented reality applications and MacBook Air with significantly improved performance at a lower price, we're very pleased with the strong customer interest for both products. Importantly, around half of the customers purchasing Macs and Ipads around the world during the quarter were new to that product and the active installed base for both Mac and iPad reached a new all time high. And the most recent surveys of consumers from 451 Research measured customer satisfaction at 95% for iPad and 96% for Mac. In the enterprise market, businesses everywhere have been making the transition to working remotely. We've created content to assist customers in this transition, including an on demand video learning series focused on topics like remote deployments of Ipads and Macs and security. We have also realigned our own retail business and enterprise teams to provide timely and relevant support to customers as they navigate new work environments. Some of our largest customers offering Mac to employees such as IBM and SAP have been able to pivot quickly to allow employees to easily set up and secure their devices from home, benefiting from Apple Business Manager and Zero Touch Deployment. And we've seen countless examples of new projects and remote deployments implemented in just a few hours. Peloton, for instance, worked with our New York teams to deploy an entire fleet of MAX overnight so their team could work remotely. In essential sectors, such as grocery and financial services, we're seeing organizations adopt our technology to better serve their customers safely. Leading grocers around the world like Trader Joe's, Woolworths, Lawson's, Sainsbury's, Lidl and Carrefour offer Apple Pay so customers can use contactless payments. And as stores shift to become fulfillment centers for online orders, organizations are leveraging apps for remote shoppers and food delivery to reduce food traffic. In Banking, where safety and security is a top priority, one way to protect company and client information is by providing corporate iOS devices to employees who use mobile phones daily as part of their jobs. As an example, Bank of America is purchasing tens of 1,000 of additional iOS devices for their workforce. Let me now turn to our cash position. First, I want to note that liquidity has not been an issue for us during these highly unusual financial market conditions. We have an extraordinarily strong balance sheet, very deep access to capital markets and unmatched free cash flow generation. We ended the quarter with $193,000,000,000 in cash, plus marketable securities, total debt of $110,000,000,000 and as a result, net cash was $83,000,000,000 at the end of the quarter. We returned $22,000,000,000 to shareholders during the March quarter, including $18,500,000,000 through open market repurchases of 64,700,000 Apple Shares and $3,400,000,000 in dividends and equivalents. Finally, as we move ahead into the June quarter, I'd like to provide some color on what we are seeing, which includes the types of forward looking information that Tejas referred to at the beginning of the call. As Tim mentioned, given the lack of visibility and certainty in the near term, we will not be issuing guidance for the coming quarter. However, based on what we have seen in April and how we think things might play out, I would like to provide some additional insight on headwinds and tailwinds we are facing. From a foreign exchange standpoint, the U. S. Dollar has appreciated recently against most currencies around the world, as a result, we expect our revenue to be negatively impacted by more than $1,500,000,000 on a year over year basis. Our global supply chain is back up and running. We are in a typical supply position, including our usual ramp associated with new products recently launched. These newly launched products, iPad Pro, MacBook Air and iPhone SE have all received outstanding customer response even during these extreme circumstances. On iPhone and wearables, we expect the year over year revenue performance to worsen in the June quarter relative to the March quarter. On iPad and Mac, we expect the year over year revenue performance to improve in the June quarter. On Services, we are seeing 2 distinct trends. 1st, customers are actively engaging with our ecosystem and digital services, and we believe the very strong recent performance in the App Store, Video, Music and cloud services will continue throughout the June quarter. 2nd, due to the overall reduced level of economic activity due to the lockdowns around the world, services like AppleCare and Advertising have been impacted. AppleCare is comprised of our product repair business and the warranty agreements with our customers, both of which have been obviously affected by store closures and reduced level of customer traffic. Advertising, which is comprised of 3rd party agreements, our App Store search ads and Apple News ads, has been impacted by overall economic weakness and uncertainty on when businesses will reopen. For gross margin, sequential headwinds include foreign exchange, the mix within products and the seasonal loss of leverage on our product business. Foreign exchange will have a 70 basis points impact sequentially and 130 basis points impact year over year. Regarding product mix, keep in mind the commentary we provided at the revenue level. Sequential tailwinds include cost savings and the mix shift towards services. With regard to capital allocation, our approach remains unchanged. We continue to invest confidently in our future, while also returning value to our shareholders. We are in the midst of developing our most exciting pipeline of products and services ever, while contributing over $350,000,000,000 to the U. S. Economy and expanding our footprint in many cities around the country over a 5 year period. We also continue to believe that there is great value in our stock and we are maintaining our target of reaching a net cash neutral position over time As a testament to the confidence we have in our business today and into the future, our Board has authorized $50,000,000,000 for share repurchases in addition to the over $40,000,000,000 authorization remaining under the current share repurchase plan. Our Board has also authorized a 6% increase in our quarterly dividend and today declared a cash dividend of $0.82 per share of common stock payable on May 14, 2020 to shareholders of record as of May 11, 2020. Finally, and most importantly, we are managing Apple for the long term as we've always done. During uncertain times historically, we have continued to invest in the business and this remains our philosophy. We will continue to stay focused on what we do best, investing in our product and service pipeline, managing the business wisely and taking care of our teams and believe we will come out from this stronger. With that, let's open the call to questions. Thank you, Luca. We ask that you limit yourself to 2 questions. Operator, may we have the first question, please? Yes. That will come from Shannon Cross, Cross Research. Thank you very much for taking my question, and I hope everyone is well. Tim, you talked about seeing some improvement in the second half of April. So I was wondering if you could just talk maybe a bit more on the segment, a geographic basis, what you're seeing in the various regions that you're selling in and what you're hearing from your customers? And then I have a follow-up. Thank you. Sure, Shannon. If you look at I'll start with China. If you look at what happened in China, we were having a really good January. The lockdown started there toward the end of January, as you know. February, we saw a steep decline in demand. We closed our stores in February. As the lockdown completed in mid February towards the second half of February, we began to open stores. We opened them on a staggered basis that took about 30 days until mid March. And from a demand point of view, we saw then improvement in March over February. And if you look at kind of where we are today, we've seen further improvement in April as compared to March. And so that's China. If you look at the rest of the world, we were doing great in January, the 1st 5 weeks of the quarter, and we do believe that we were headed toward the sort of the top end of our expectations that we had talked to you about on the last call that the next 5 weeks were spent sort of reacting and getting the supply chain back up in full force and working through the sharp decline in China that I already talked about. The real thing for the rest of the world happened in March when the shelter in place orders went in and the work from home began, for those 2, 3 weeks period, at the end of the quarter, we saw a sharp decline in demand. If you now step out until April and look at that, early April started like the end of March, but in the second half of April, we've seen an uptick across really across the board. It's not just related to a certain GEO or a certain product. We think by looking at it, a part of it is due to just our new products, a part of it is due to the stimulus programs taking effect in April, and then a part of it is probably the consumer behavior of knowing this is going to go on for a little while longer and getting some devices and so forth lined up to work at home more. In particular for, as I think Lucas shared, we believe that iPad and Mac are going to improve on a year over year basis during this quarter, and that's customers that are either taking online education or working remotely. And so complex answer to your question, but that's what we're saying. Thank you. That was helpful. Luca, unless I missed it, you talked about various puts and takes in the quarter, but didn't really discuss operating expenses. I know you mentioned some cost savings on the COGS line. I'm curious how you're thinking about your spending in OpEx given some of the macro challenges that you may be facing. Thank you. Yes. Well, Shannon, as we said, we manage the company for the long term, right? So we know that the core of the business, the core of the company is innovation and product and services development. So we will continue to invest in our pipeline. We're very excited about what we have in store and so we will continue to invest there. Obviously, we are aware of the environment and so we will manage the SG and A portion of the company tightly. We are making new investments in the new services that we launched recently. We as you know, we purchased the baseband activities from Intel and obviously we want to develop that technology because we consider it's a core technology for us. And so we would try to balance the need to continue to invest during difficult circumstances and the fact that we like to manage the business wisely. Thank you, Shannon. Thank you. Can we have the next question please? That will be from Wamsi Mohan with Bank of America. Yes, thank you. Tim, I think I speak for everyone on the call that we're all very appreciative of Apple's contribution during this pandemic. We all appreciate it. Thank you very much for that. No, it's been great. Tim, in past downturns, we have not really seen Apple pull back from investing and you as a company have largely maintained the product introduction cadence. But given these are unprecedented times and there are a lot of challenges associated with product development during a time when you have a global footprint for such activities and unable to really do a lot of things in person, how should we think about the product development and introduction cadence as we go over the next several quarters? And I will follow-up. Well, we're continuing to operate. And so as you can tell, else going on, we were able to launch and ship the iPhone SE, the iPad Pro with the Magic Keyboard and the MacBook Air. And so business continues and the new products are our lifeblood. And so we're continuing to work. Everybody is getting used to the work at home In some areas of the company, people may be even more productive. In some other areas, they're not as productive. Mixed depending upon what the roles are. But as you can tell from what we did this quarter, despite the environment, we have our head down and are working because we know that our customers want the products that we've got. They're even more important in these times. Thank you, Tim. As a follow-up, I know you're doing a lot with both the Apple Card and financing plan for iPhones to get your products in the hands of customers. But I was wondering, would you consider using the strength of your balance sheet maybe a little differently, structure maybe deferred payments or things like that? And or do you think that there could be other steps like bundling that you will consider versus what you already currently do? Thank you. Well, as you know, we launched the payment plan earlier on Apple Card for iPhone. We are working on doing that for other products as well, and you'll see something on that shortly. So we're very focused on the affordability point. The trade in programs also are fairly wide across the board and act as both something great for the environment, also something great from a way to get that entry price down. In terms of deferred payments, nothing to announce today. But as you know, having access to the card, at least in the United States, gives us more degrees of freedom. And that is not using our balance sheet. But we play a key role in deciding what kind of programs go with the card. Thanks, Wangzhi. Can we have the next question, please? That will come from Morgan Stanley's Katy Huberty. Thank you for the question. I hope the whole team is staying healthy and safe. Tim, I want to start on a longer term question. Where do you see structural changes on the back of this health crisis that might present opportunities for new revenue streams at Apple. And I'm particularly thinking about your past comments on health and augmented reality, but I'm sure there's even more areas of inspiration and creativity coming out of the company. And then I have a follow-up. I think there are things from just a great reminder of how important our products are for remote work. And it's pretty clear to me that where things will get a lot closer to normal than they are today, obviously, I think many people are finding that they can learn remotely, and so I suspect that trend will accelerate some. I think that's probably also true about working remotely in some areas and in some jobs. And so I think we have significant solutions and products for those for all of those groups. On the health area, I gave some examples in my opening comments about the ECG being used on the watch. You can bet that we're looking at other areas in this. We were already doing that because we viewed that, that area was a huge opportunity for the company and a way for us to help a lot of people. And so you will see us continue on that. I wouldn't say that the health door opened wider. I would say it was already opened fairly wide. Okay. And then as a follow-up, the $50,000,000,000 share repurchase authorization is impressive in absolute terms, but it is a bit lower than the last couple of years. So just any context around the thought process of landing on $50,000,000,000 And then related to that, you have one of the strongest balance sheets in the world. Does the current environment change your thinking at all around M and A opportunities? General, our general, our approach to capital allocation has remained the same for the last several years and it's not changing now. Keep in mind, here we're talking about just the authorization, right? And when you look at our actual results the end of every quarter, you see how much we actually do in terms of share repurchases. The $50,000,000,000 is in addition to over $40,000,000,000 that is still remaining from the past authorization that we've received from our Board, right? So it's the total available or outstanding in terms of authorization is over 90%. And as you look at our run rate during the last several years, you know that that is a very adequate amount. And as you know, we will provide an additional update a year from now. So nothing really has changed there. And nothing has changed on our approach for M and A. We've been quite active over the last several years. We purchase companies on a very regular basis. We're always looking for ways to accelerate our product roadmaps or fill gaps in our portfolio, both on the hardware side, on the software side, on the services side. So we will continue to do that. And so also on the M and A front, nothing has changed. Thank you. Be well. Thank you. Thanks, Katy. Can we have the next question, please? That will come from Amit Daryanani with Evercore. Thanks for taking my question. I have 2 as well. I guess first off on the channel inventory, I was hoping if you could talk about how did channel inventory look like in the March quarter? Because it sounds like it may be below the historical ranges. And then the discussion you had for June quarter performance of iPhones, what are you embedding from a channel building back inventory levels or not in that expectation? Brett, it's Tim. If you look at the iPhone channel inventory during Q2, the reduction of it was more than the reduction from the previous year. It's not unusual that we reduce in Q2. And in fact, if you look back on generally speaking, in the first half of the calendar year, we reduced channel inventories. During the second half of the calendar year, we generally raise channel inventories. That's a seasonal thing, and I believe sitting here today, I believe that will happen this year as well. So hopefully that answers your question. And by the way, we ended in a comfortable position. So you could conclude from that that we were within a target range. That's really helpful. And then just a follow-up. Tim, I was hoping you could maybe talk a little bit about how do you think about Apple's manufacturing strategy and perhaps need for some diversity, especially given everything the company has ever gone through over the last 12 months. How do you think about that? And do you feel comfortable that the supply chain and the manufacturing base is well situated today to launch the traditional fall products that we use to get it from Apple? As you know, our supply chain is global. And so our products are truly made everywhere. And I would focus on that versus focus on one element of the manufacturing process, which tends to get more visibility, which is the final assembly. We have some final assembly in the United States. We have final assembly in China as well. I think you'd have to conclude or at least I conclude that if you look at the shock to the supply chain that took place this quarter for it to come back up so quickly really demonstrates that it's durable and resilient. And so I feel good about where we are. That said, we're always looking at tweaks, and it's just not something we talk about because we view it as confidential and competitive information. And so we will look at the as we get out of this totally, we will look to see what we learned and what we should change. Thank you, Amit. Can we have the next question please? We'll hear from Gerald Ong with Deutsche Bank. Hi, guys. Thanks for letting me ask a couple of questions. So I want to focus the question on services. The segment was solid in the quarter despite overall macro weakness. I can kind of see a lot behind it being strong despite product weakness overall. As you kind of look at the rest of the year, do you think that sustains or at some point, do macro impacts worldwide impact the services line? Sergio, let me take that one. We typically don't give a lot of specifics about our categories, but I've said as we look into the June quarter, we see 2 distinct trends in our services business overall. Our ecosystem is very strong. Our customers are very engaged. We are continuing to grow double digits the number of transacting accounts and paid accounts. And so we expect our digital services to continue at the same level of performance that we have seen during the March quarter and that includes the App Store, of course, our video business, our music business, cloud services. So we expect all these businesses to continue to grow very strongly. Given the overall economic environment and level of demand right now, there are 2 businesses that we believe are going to be impacted during the June quarter. One of them is AppleCare. AppleCare is essentially comprised of our product repair business and the warranty agreements that we signed with our customers when they purchase our devices. Both these businesses have been affected obviously by the store closures, not only our retail stores, but also our partners' points of sale. And obviously, the reduced level of customer traffic because of the social distancing measures, right? And we do expect AppleCare to be affected during the June quarter. The other business which we think is going to be impacted by the overall economic weakness and the uncertainty on when businesses will reopen is advertising, which is the sum of our advertising business on the App Store, on Apple News and the 3rd party agreements that we have on the advertising front. So these are two things that during the June quarter will create a headwind for the services business. Got it. Appreciate that. My second question comes about the overall purchasing decisions consumers are making. So far through April, have you seen increased perhaps down ticks across your product line? So for example, somebody might have a shift maybe towards the lower end of the storage mix of certain products. And do you expect that going forward as unemployment uptick and macro impacts kind of layer on through the rest of 2020? Thanks. I haven't seen what you're asking. No. I have seen a strong customer response to iPhone SE, which is our most affordable iPhone, but it appears that those customers are primarily coming from wanting a smaller form factor with the latest technology or coming over from Android. And so those are the 2 principal kind of segments versus somebody buying down as you're talking about it. We've also seen we launched the iPad Pro in the midst of all of this, and the reception there has also been incredibly good. And that's obviously our top of the line iPad. And so I'm not seeing what you're alluding to, at least at this point. Thanks, Gerio. Can we have the next question? Thanks, guys. That will be from JPMorgan's Samik Chatterjee. Hi. Thanks for taking the question. So if I can just start with a question on kind of what you're seeing in China. You mentioned kind of the pickup in activity, but is that driven by more kind of footfall in the stores? Or what are you seeing relative to online activity? And how much of this recovery is driven online? Any thoughts on that, please? Yes. What we saw in China for the full quarter, and I'll speak about Mainland China because I think that's the source of your question, we saw strong results in iPad and in wearables and in services. And if you look up underneath the full quarter, we saw strong January and then a significantly reduced demand in February as the shelter in place orders and the lockdowns went into effect in China and the stores closed. And then in March, as stores reopened, we've the recovery began and then we've seen further recovery in April. Where that goes, we will see, but that's kind of what we've seen so far there. To your question about store traffic, store traffic is obviously up from where it was in February, but it is not back to where it was pre the lockdown. There has been, however, more move to online. And as I'd mentioned earlier in my remarks, the and it's pretty phenomenal actually. Retail had a quarterly record for us during the quarter, and that's despite stores being closed for the 3 week period around the world and or ex China, and then China was closed prior to that 3 weeks. And that's partly because the online store had such a phenomenal quarter, and that included in China, but it was also other regions as well. So there is definitely a move. And whether that's a permanent shift, I would hesitate to go that far because I think people like to be out and about. They just know that now is not the time to do that. Got it. And if I can just follow-up on your previous comment about the strong demand you're seeing for iPhone SE. Just given the price point, I'm wondering if you're expecting any change in terms of the geographic mix of where the demand comes from relative to typically what you see for other iPhones in the lineup just given the lower price point? I think it plays in every geo, but I would expect to see it doing even better in areas where the median incomes are less. And so we'll see how that plays out. And I expect some fair number of people switching over to iOS. And so it's an unbelievable offer. It's, if you will, the engine of our top phones in a very affordable package. And I think and it's faster than the fastest Android phones. And so it's an exceptional value. Thank you. Can we have the next question please? Certainly. Our last question today will be from Chris Caso with Raymond James. Yes, thank you. I wanted to follow-up with another question on iPhone SE and the decision to bring it back and where it sits within the total iPhone strategy. And I guess coupled with the fact that iPhone 11, you made the decision to bring that at a lower price point, what does that tell us with respect to your approach to iPhone pricing and flexibility? Is this helping to add users and kind of bring people into the ecosystem? And if so, what does that imply for gross margins? Chris, we've always been about delivering the best product at a good price. And that fundamental strategy has not changed at all. As you know, we did have an SC for a while. It's great to bring it back. It was a beloved product. And so I wouldn't read anything into that other than we want to give people the best deal that we can while making the best product. Okay. As a follow-up, the follow-up question is on commodity pricing. And I think you had expected to see some commodity price declines through the March quarter. If you could talk about what you expect as you go through the year perhaps in this new environment and again whether that turns into a tailwind or a headwind for gross margins as you go into the second half? Yes. For March, Chris, we saw NAND pricing increase slightly, while DRAM and displays and the other commodities declined. For the June quarter, we would expect NAND and DRAM pricing to remain at this historically low level, while displays and most other commodity prices we expect to decline. Thank you. Yes. Thank you, Chris. A replay of today's call will be available for 2 weeks on Apple Podcasts as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888 203-eleven 12 or 719-457-0820. Please enter confirmation code 3,229,513. These replays will be available by approximately 5 p. M. Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. And that does conclude today's conference. Thank you all for joining us today.