Transcript of Apple's Q2 Earnings Call: Neo Drives Record High New Mac Users, Suggestion for New CEO to Focus on Time Management

Below is a summary of the key Q&A portion of the conference call:

Morgan Stanley Analyst Erik Woodring: Tim, I’ll save the farewells for next quarter, it’s been a pleasure working with you. My first question is, could you elaborate on the “supply constraints” you mentioned earlier in the briefing? In other words, how much did demand exceed supply for iPhone and Mac products in the March quarter? Also, does management’s guidance for the June quarter reflect these supply constraints for these product lines? Or is the current guidance for the June quarter an ideal expectation under “unconstrained supply”?

Tim Cook: We were indeed affected by supply constraints in the March quarter, primarily for iPhone, with a relatively smaller impact on Mac. As we mentioned in our last call, the constraints are mainly due to capacity limitations in advanced process technology for our chips.

Looking ahead to the June quarter, we continue to see strong user demand, and we believe supply constraints will be concentrated on certain Mac models. Overall, our flexibility in the supply chain will be slightly lower than usual.

Specifically, regarding the supply constraints for Mac in the June quarter, I believe there are two main factors. First, the Mac mini and Mac Studio are excellent platforms for AI and intelligent agent tools, and user recognition of this is much higher than we expected, resulting in overall product demand exceeding expectations. Second, the market response to the MacBook Neo has been exceptionally strong, with product demand also exceeding expectations. Driven by the MacBook Neo, we saw a record high number of new Mac users (first-time Mac buyers) in the March quarter.

Looking ahead, we expect the Mac mini and Mac Studio may take several months to achieve supply-demand balance. I hope this information helps you understand our situation on the supply side in the second and third fiscal quarters.

Morgan Stanley Analyst Erik Woodring: My second question is for Kevin. You mentioned earlier in the briefing that the company’s “net cash is trending towards neutral” and that the company will no longer disclose “net cash” as a formal item. Could you elaborate on this? For example, is management considering adjustments to the company’s capital return policy? It doesn’t seem like it currently, but could management share more details with us? Also, the “investments” mentioned in the briefing, are these investments for organic growth or external acquisitions? Could you provide more details?

Kevin Parekh: Let me elaborate on what we mentioned in the briefing. This is actually an explanation of the company’s capital structure. Our goal of “adjusting net cash to zero” has worked well all along. Since 2018, it has been a valuable benchmark for the company and our capital structure.

However, as things have developed, we believe the company has reached a new stage, and it is more appropriate for us to “evaluate cash and debt separately,” which will help us make better decisions in utilizing debt and cash to support the business. In other words, we can allocate funds more flexibly based on business needs and market conditions. At the same time, we also believe that while maintaining this flexibility, we can still operate efficiently and maintain our consistent prudence.

Based on this, Apple remains committed to returning excess cash to shareholders. As we mentioned before, business investment is still our top priority, followed by returning remaining cash to shareholders. I think we have always maintained good efficiency and prudence in this regard: since the project started, we have returned more than $1 trillion to shareholders, of which more than $850 billion was through stock repurchases. In addition, we have increased the stock repurchase authorization by $100 billion.

I believe you can see that capital return is always very important to us. As we mentioned in the briefing, this is also an important part of our long-term shareholder value strategy.

Melius Research Analyst Ben Reitzes: My first question is about the recent discussions surrounding “agentic smartphones.” Frankly, I’m not entirely sure what that refers to. However, I’ve seen some views suggesting that the development of cutting-edge AI technology may drive the development of smartphones and even change the form factor of phones.

So, I’d like to ask management, how do you understand this trend with the rise of these “AI agents”? Does this mean that new product forms will emerge in the future? Or will the emergence of “AI agents” fundamentally change the industry landscape? Or, on a more macro level, what are your views on this trend?

Tim Cook: We won’t provide specifics on future product roadmaps, and I don’t want to reveal too much on that front. However, I can say that we are very satisfied with the performance of our iPhone products. This quarter, iPhone products achieved 22% growth, continuing the strong performance we saw in the first fiscal quarter. From last year’s new product launch to this year’s March quarter, it’s been one of our strongest product cycles in history, and we couldn’t be happier.

Melius Research Analyst Ben Reitzes: Regarding the supply constraints mentioned earlier, Tim, I have a follow-up question. Currently, the market is concerned about how product margins will change in the next June quarter, considering component costs, industry trends, and these supply constraints. Does management have a more macro-level view or principles to help us understand future product margin trends?

Also, does management believe that the current earnings model will experience significant fluctuations? Or will gross margins still be maintained in the 47% to 48% range? Or does management believe that the situation after June is unclear and cannot provide a clear judgment yet? If management could provide some directional guidance from a full-year perspective, it would be very helpful.

Tim Cook: Let me specifically talk about the issue of memory supply, as I believe that’s the core of your question. Let me briefly outline the timeline starting in December last year.

In the December quarter last year, the impact of memory prices on us was relatively small, as you can see from the gross margin performance. We mentioned at the time that the impact on the March quarter would increase, and that’s what happened. In the March quarter, memory costs did increase, but part of the cost increase was offset by gains from inventory turnover.

Looking ahead to the June quarter, as Kevin mentioned in the guidance, we expect memory costs to increase significantly, but there will also be some cost offset from inventory turnover gains. As for the situation after June, we haven’t provided more specific guidance. But I can tell you that we believe the impact of memory costs on the business will gradually increase after June. We will continue to assess the industry situation and consider various response options, as we said before.

Goldman Sachs Analyst Michael Ng: My first question is, with the successful launch of the MacBook Neo, could management talk about how this product has helped Apple increase product penetration among new user groups? For example, the education market, price-sensitive users, or emerging markets. Also, from a macro perspective, how does management view the opportunities in markets where product penetration is still low? How will the company’s future product roadmap help increase product penetration in these markets?

Tim Cook: Currently, our supply of MacBook Neo products is constrained. Market feedback has been very strong, and in fact, we were very optimistic about it even before the product launch, but the actual market enthusiasm exceeded our expectations.

One of the core goals of this product is to cover more user groups for Mac. We focus on two types of users: one is new users who are using a Mac for the first time; the other is old users who haven’t upgraded their devices for a long time. Currently, we are performing well in both aspects. As Kevin mentioned earlier, some schools, such as the Kansas City Public Schools, are replacing their Chromebooks and Windows PCs with MacBook Neos. I’m also hearing more and more similar cases, not only in school systems but also among individual consumers.

Overall, we are very satisfied with the progress.

Goldman Sachs Analyst Michael Ng: My second question is about advertising in Apple’s services business. Could management please tell us whether the new ad placements added by Apple in the App Store earlier this year contributed significantly to the service business’s growth and outperformance this quarter?

Also, could management talk about your advertising strategy, especially this summer, when Apple plans to introduce advertising content into the Maps app? How is management considering the overall layout?

Kevin Parekh: In terms of our advertising business, our advertising business did achieve year-on-year growth. As you mentioned, we recently introduced more ad placements in the App Store search results, providing developers with more advertising formats and allowing users to drive app downloads on a platform they trust.

Also, as you said, this summer we will introduce advertising services in Apple Maps in the United States and Canada, in key search and discovery scenarios, providing local businesses with a new way to reach customers and help users explore new places and locations.

At the same time, I want to emphasize that we believe we can help businesses of all sizes grow through advertising services while still providing an excellent user experience while respecting user privacy, and these points are equally important to us.

Bank of America Analyst Wamsi Mohan: Tim, you mentioned earlier that the impact of memory costs will increase further after the June quarter. You have advantages in scale, supply chain efficiency, and long-established partnerships. Based on this, when thinking about product positioning and pricing strategies with competitors in this volatile period, will Apple’s strategic focus be more on gaining market share? For example, not raising prices when competitors are under pressure, or even adopting a more aggressive strategy on mass-market product lines? Or will management be more focused on maintaining profitability? In other words, how do you want us to understand the company’s decision-making at this stage?

Tim Cook: As memory costs rise, we will continue to evaluate a range of response options. I don’t want to elaborate further on this at the moment.

Bank of America Analyst Wamsi Mohan: I have a follow-up question. Regarding Apple Foundational Models and the “dual-track strategy” of partnering with Google while continuing to advance self-developed models internally, could you share the latest progress? How is management balancing these two paths? Also, does management believe that further investment is needed to advance both key efforts simultaneously?

Tim Cook: This is a great question. We are increasing investment, as you can see from our operating expenses. As I mentioned before, our R&D spending has grown significantly year-on-year. Currently, our partnership with Google is progressing smoothly, and we are satisfied with the current situation. At the same time, we are also excited about the progress of our independent work within the company.

Bank of America Analyst Wamsi Mohan: I have a follow-up question. Kevin, compared to recent years (at least the last two years), the year-on-year decline in product gross margin this year has been relatively mild. Is this mainly driven by changes in product structure? Or is there also a tailwind from exchange rates? Could you break down what’s different about this year’s gross margin performance compared to the past? Also, could you detail how much exchange rates impacted gross margin this quarter?

Kevin Parekh: In terms of products, our product gross margin fell by approximately 200 basis points year-on-year in the second fiscal quarter, as Tim mentioned earlier, mainly due to the weakening of seasonal scale effects and rising memory costs.

However, from a broader perspective, to understand the drivers of the company’s overall gross margin changes, I can briefly outline it. Overall, the company’s gross margin increased by 110 basis points year-on-year, mainly due to positive business structure and the decline in tariff-related costs, but this was partially offset by the weakening of seasonal scale effects and rising memory costs.

Regarding the decline in tariff costs, Tim will answer this question and provide more background and explanation for everyone.

Tim Cook: In the March quarter, our gross margin of 49.3% already included the impact of tariff-related costs. However, compared to the December quarter last year, tariff costs decreased in the March quarter, mainly because product shipments decreased quarter-on-quarter. In addition, we benefited from two favorable factors: one is the reduction in IEEPA tariff rates, which had a positive impact on the entire quarter; the other is the implementation of “Section 122,” which led to a reduction in global tariff rates.

Regarding tariff refunds, we are applying according to the established procedures. Once we receive the funds, we plan to reinvest them in innovation and advanced manufacturing in the United States. This funding will be additional investment on top of our previously committed investments in the United States.

Kevin Parekh: Finally, let me add a point about the impact of exchange rates you mentioned. From the first fiscal quarter to the second fiscal quarter, exchange rate factors had basically no impact on gross margin.

Wells Fargo Analyst Aaron Rakers: My question concerns the end market situation. Tim, could you talk about what you’re seeing in the Chinese market? From a competitive perspective, have you observed that supply constraints on competitors have given you a certain advantage? Also, what are your overall views on the Chinese market?

Tim Cook: We are very satisfied with Apple’s performance in Greater China. In the first half of the year, we achieved 33% growth; in the March quarter, revenue increased by 28%, setting a new quarterly revenue record. This performance was mainly driven by iPhone. iPhone sales in the Chinese market also set a new record for the March quarter. In terms of individual products, iPhone is the best-selling model in the Chinese urban market; Mac mini is the best-selling desktop computer; and MacBook Air is the best-selling laptop.

Overall, we performed very well across all product lines. I also went to China in March this year, and foot traffic in our stores increased by double digits. We also celebrated Apple’s 50th anniversary in Chengdu, China, and it was great to be able to participate in the local community in person.

Overall, I am very satisfied with our performance in the Chinese market in the first half of the year.

Wells Fargo Analyst Aaron Rakers: My second question is similar to the previous one, regarding Apple’s performance in the Indian market. In the past few quarterly conference calls, the Indian market has been a key focus for management. How does management view the changes in the Indian market? For example, how does management view the growth of the iPhone user base in the Indian market? With the rise of the Indian middle class, what opportunities have you seen? In general, how does management assess the overall growth space and opportunities in this vast mobile phone market in India?

Tim Cook: I think the Indian market represents a huge opportunity for us. We have been investing in the local market for some time.

India is the second largest smartphone market and the third largest PC market in the world. Although we have achieved quite good results locally, our market share is not high, which precisely shows that we have a lot of room for future growth.

In the Indian market, a large number of users have entered the middle class in recent years, and our current and upcoming products can well meet their needs. In terms of various product lines, whether it’s iPhone, Mac, iPad, or Apple Watch, most consumers in the Indian market are first-time buyers of these products, which is very beneficial for us to expand our user base.

Overall, I am very excited about the prospects for Apple’s development in the Indian market.

Jefferies Analyst Samik Chatterjee: Tim, my first question is, last quarter you mentioned Apple Foundational Models and a “dual-track strategy” of partnering with Google while continuing to advance self-developed models internally.

Could you share the latest progress? How is management balancing these two paths? Also, does management believe that further investment is needed to advance both key efforts simultaneously?

Tim Cook: This is a particularly good question. We are increasing investment, as you can see from our operating expenses. As I mentioned before, our R&D spending has grown significantly year-on-year. Currently, our partnership with Google is progressing smoothly, and we are satisfied with the current situation; at the same time, we are also excited about the progress of our independent work within the company.

Jefferies Analyst Samik Chatterjee: I have a follow-up question. Kevin, compared to the past few years (at least the last two years), the year-on-year decline in product gross margin this year has been noticeably milder. Is this mainly driven by product mix changes? Or is there also a favorable impact from exchange rates? Could you break down what’s different about this year’s gross margin performance compared to the past? Also, could you detail how much exchange rates impacted gross margin this quarter?

Regarding the decline in tariff costs, this question is best answered by Tim, who can provide more background and explanation for everyone.

Evercore ISI Analyst Amit Daryanani: My first question is, with the successful launch of the MacBook Neo, could management talk about how this product has helped Apple increase product penetration among new user groups? For example, the education market, price-sensitive users, or emerging markets. Also, from a macro perspective, how does management view the opportunities in markets where product penetration is still low?

One of the core goals of this product is to cover more user groups for Mac. We focus on two types of users: one is new users who are using a Mac for the first time; the other is old users who haven’t upgraded their devices for a long time. Currently, we are performing well in both aspects. As Kevin mentioned earlier, some schools, such as Kansas City Public Schools, are replacing their Chromebooks and Windows PCs with MacBook Neos. I’m also hearing more and more similar cases, not only in school systems but also among individual consumers.

Overall, we are very satisfied with the progress.

Evercore ISI Analyst Amit Daryanani: Tim, I think this will likely be your last earnings call. I’d like you to briefly talk about the upcoming handover.

You always mention the advice Jobs gave you when you took over. I may not remember it exactly, but the gist was: “Don’t think about what I would do, just do what you think is right.” In my view, this advice has had a very positive effect on Apple and shareholders over the past 15 years. I’d also like to know what advice you would give to John Ternus (Apple’s new CEO) to help him continue Apple’s existing strengths while shaping the company’s new chapter?

Tim Cook: I think Jobs’ advice to me at the time really relieved a lot of pressure. For me, this advice has been very useful over the past 15 years.

As for John, my advice to him, or what I’ve told him, is that one of the most important decisions he needs to make is how to allocate his time. Personally, I would devote time to the things that are most valuable to the company and users. At the same time, never forget the company’s “North Star,” never forget the company’s fundamental mission. For Apple, our “North Star” is to create the best products in the world and truly enrich people’s lives. If you can always think and make decisions around this point, it will naturally bring excellent results and enable us to continue to create more products, ultimately forming a positive cycle.