Apple’s (AAPL) conference call took place on April 26, 2016, 05:00 PM ET. Below is the full transcript of the conference call.
Please stand by we are about to begin. Good day everyone and welcome to this Apple Incorporated Second Quarter Fiscal Year 2016 Earnings Release 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 Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma’am.
Nancy Paxton:Senior Director, Investor Relations:
Thank you. Good afternoon and thanks to everyone for joining us today. Speaking first is Apple CEO, Tim Cook, and he will 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, future business outlook, and plans for capital return and debt.
Actual results or trends could differ materially from our forecasts. For more information, please refer to the risk factors discussed in Apple’s Form 10-K for 2015 the Form 10-Q for the first quarter of fiscal 2016 and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speaks as of their respective dates. In addition today’s comments will refer to a metric we described as the purchased value of services tied to our install base.
This is a non-GAAP measure and a reconciliation to the corresponding GAAP measure can be found on our Investor Relations website at apple.com/investor.
I’d now like to turn the call over to Tim for introductory remarks.
Tim Cook – Apple’s CEO:
Thanks, Nancy, and good afternoon, everyone, and thank you very for joining us. Today, we’re reporting results of a very busy and challenging quarter and we’re also announcing an update to our capital return program. Revenue for the quarter, was $50.6 billion, which was within our guidance range. Despite the pause in our growth, our results reflect excellent execution of our team in the face of ongoing macroeconomic headwinds in much of the world and difficult year-over-year comparisons.
We saw continued currency weakness in the vast majority of our international markets, in constant currency, our revenue declined by 9% from last year, 400 basis points less than the reported decline of 13%. For the first half of the fiscal year, our revenue in constant currency was up 1% year-on-year. Despite challenges, there were a number of encouraging sings during the quarter.
Our installed base of over 1 billion active devices continue to grow strongly, we added a huge number of Android Switches are new to Mac customers and we generated very strong growth from services.
We sold 51.2 million iPhones in the quarter consistent with the range of our own expectation but lower than the exceptional year-ago quarter when we saw an acceleration in iPhone upgrade and 40% iPhone sales growth over the previous year. To provide some additional color, iPhone sales come from three sources; Customers who upgrade from previous iPhone models, customers who switch from Android and other operating systems, and customers who purchase a smartphone for the host on. As we look at each of these three sources of iPhone sales, we see a business that it’s healthy and strong. First from an upgrade perspective.
During the first half of this year the upgrade rate for the iPhone 6S cycle has been slightly higher than what we experienced in the iPhone 5S cycle two years ago but it is lower than the accelerated upgrade rate we saw with iPhone 6 which as you know was a big contributor to our phenomenal revenue growth a year-ago.
Mostly importantly, our customers are incredibly loyal. Our recent survey of U.S smartphone purchasers indicated a 95% iPhone loyalty rate, the highest ever measured for any smartphone. Second, we continue to see a very high level of customers switching to iPhone from Android and other operating systems. In fact we added more switchers from Android and other platforms in the first half of this year than any other six month period ever.
And third, with only 42% smartphone penetration of the global handset market today iPhone is still attracting millions of first time smartphone buyers each quarter especially from emerging markets. For example, in India our iPhone sales were up 56% from a year ago.
Next I would like to talk about services which was our second largest revenue generating category during the quarter. Setting aside the amount we received from our patent settlement in the December quarter the March quarter services revenue was our highest ever. Services revenue jumped 20% to $6 billion. App Store revenue was up 35% to beat last quarter’s all time record and Apple Music continues to growing popularity with over 13 million paying subscribers today.
We feel really great about the early success of Apple’s first subscription business and our music revenue has now hit an inflection point after many quarters of decline. The services business is powered by our huge install base of active devices which crossed 1 billion units earlier this year. As we discussed on this call in January, there is 1 billion plus active devices are a source of recurring revenue that is growing independent of the unit shipments we’ve report every three months. In fact the purchase value of services tied to our installed base was a record $9.9 billion in the March quarter up 27% over last year accelerating from the 24% growth rate we reported in the December quarter.
The reach of Apple Pay also continued to expand following a very successful launch in China in the March quarter and last week’s rollout in Singapore. Apple Pay is growing at a tremendous rate with more than 5 times the transaction volume over year ago and 1 million new users per week. There are more than 10 million contactless ready locations in the countries where Apple Pay has launched today including over 2.5 million locations now accepting Apple Pay in the United States and more expansion of Apple Pay is coming soon.
Turning to the Mac, we made our sell-in expectations in addition to reducing channel inventory by about 100,000 units. Overall the Mac continues to attract a large percentage of new customers. In our latest survey of major markets over 0.5 of buyers were new to the Mac and in some countries the percentage is extremely high like in China for over 80% of customers were purchasing a Mac for the first time. We are confident in our Mac business and our ability to continue to innovate and gain share in that area.
Turning to the Apple Watch, units sales met our expectations in the quarter. For some color on how we think about Apple Watch sale, we expected seasonality to be similar to the historical seasonality of iPad which typically generated 40% or more of its annual unit sale through in the December quarter. We started to ship Apple Watch just one year ago