Apple conference call: "Most" US devices will come from India and Vietnam, tariffs may lead to a $900 million increase in Q3 costs

Apple's performance in the second fiscal quarter barely exceeded expectations, but its future growth prospects remain uncertain under the impact of Trump's tariff policies.

During the earnings call held overnight, Apple CEO Tim Cook announced that most devices sold in the U.S. will be produced in India and Vietnam to cope with potential tariff pressures. Cook estimated that tariffs will add an additional $900 million (approximately 6.54 billion RMB) in costs for the company's third fiscal quarter (April-June), and he hinted that this figure could be higher in the coming quarters. Apple declined to disclose whether it would raise prices or pass costs onto consumers. Meanwhile, Apple's AI development is progressing slowly, and the App Store is facing legal challenges in the U.S., all of which affect investors' confidence in Apple's long-term growth prospects.

Supply Chain Shift Under Tariff Shadows

In the latest earnings call, Cook made a shocking announcement to the market: in the upcoming June quarter, “most” iPhones sold in the U.S. will come from India, while “almost all” other devices (including iPads, Macs, Apple Watches, and AirPods) will come from Vietnam. This strategic shift aims to mitigate the impact of the Trump administration's tariff policies on the company.

“We learned a lesson long ago that putting everything in one place is too risky,” Cook stated.

Over the past few years, Cook has viewed India as an important manufacturing partner. Analysts estimate that if India's iPhone production capacity (approximately 25 million units) is fully allocated to the U.S. market, it could meet about 50% of U.S. demand.

Additionally, Cook mentioned that Apple is sourcing glass and Face ID modules from the U.S. while purchasing 19 billion chips from 12 states.

$900 Million! Financial Pressure Intensifies

Apple expects that if current policies remain unchanged, tariffs will add $900 million in costs for the company in the third fiscal quarter. Cook hinted that the impact in future quarters could be more severe, declining to disclose whether prices would increase or if costs would be passed on to consumers.

Regarding pricing, we have nothing to announce today. I just want to say that the operations team has done an excellent job optimizing the inventory supply chain. We will certainly do our best to continue this work.

Despite these challenges, Apple’s financial performance this quarter still exceeded expectations. In the second fiscal quarter (January-March), Apple’s revenue grew by 5% to $95 billion, and net profit increased by nearly 5% to $24.8 billion, with iPhone sales rising by 2%. However, investors remain concerned about future prospects, and Apple’s stock price fell by about 4% in after-hours trading.

TechInsights data shows that Trump's tariff policies could increase the hardware cost of the iPhone 16 Pro by approximately $300-$500

AI Strategy Progressing Below Expectations, Apple's AI May Boost Sales

Cook acknowledged that the development progress of the personalized Siri features announced by Apple at WWDC 2024 is behind schedule.

“We are making progress and look forward to delivering these features to customers,” Cook said, “it’s just taking longer than we expected.”

Interestingly, Cook pointed out that in countries where Apple Intelligence has been launched, the year-over-year performance in the March quarter was stronger than in countries where the feature has not been launched, suggesting that AI features may be an important factor driving sales.

Multiple Legal Challenges May Impact Service Revenue

Apple is currently facing several significant legal challenges. A U.S. federal judge recently issued a harsh critique of Apple's App Store policies, calling for remedial measures that could affect the company's service revenue streams. More concerning is that the judge has taken extraordinary measures due to Apple's actions, submitting the matter for criminal contempt investigation.

During the conference call, Cook reiterated Apple's statement regarding compliance and appeals, and did not disclose more details other than stating that the outcome remains unclear.

About a quarter of Apple's operating profit comes from the default search engine royalties paid by Google, amounting to as much as $20 billion annually, but analysts suggest that this revenue source may soon disappear following another antitrust ruling.

Below is the full transcript of the conference call:

Apple Q2 2025 Earnings Conference Call

Suhasini Chandramouli, Director of Investor Relations:

Good afternoon, and welcome to Apple’s Q2 fiscal 2025 earnings conference call. I’m Suhasini Chandramouli, the Director of Investor Relations. This call is being recorded. First to speak today is Apple’s CEO Tim Cook, followed by CFO Kevan Parekh.

After that, we will begin the analyst Q&A session. Please note that some of the information you hear in today’s discussion will contain forward-looking statements, including but not limited to statements regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation, and future business outlook, including the potential impact of tariffs and other trade measures as well as macroeconomic conditions on the company’s business and operating performance. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecasts. For more information, please refer to the risk factors discussed in Apple’s most recent 10-Q, 10-K, and 8-K reports filed with the U.S. Securities and Exchange Commission (SEC) today, as well as in press releases.

Additional information will also be included in our 10-Q report for the quarter ending March 29, 2025, which we will file tomorrow, along with other reports and documents submitted to the U.S. Securities and Exchange Commission. Apple does not undertake any obligation to update any forward-looking statements, which represent its views as of the date of release. Now, I would like to turn the call over to Tim for his opening remarks

CEO Tim Cook:

Thank you, Suhasini. Good afternoon, everyone, and thank you for joining the conference call.

Today, we reported revenue of $95.4 billion, a year-over-year increase of 5%, at the high end of last quarter's guidance range. Diluted earnings per share were $1.65, an 8% year-over-year increase, setting a new record for the March quarter. Service revenue reached an all-time high, growing 12% year-over-year. We also set multiple quarterly records in several countries and regions around the world, including the UK, such as Spain, Finland, Brazil, Chile, Turkey, Poland, India, and the Philippines.

We remain committed to innovation and originality to enrich our customers' lives and help us lead the world to become a better place. We are proud to enhance our impact globally, including in the United States, where we recently announced a plan to invest $500 billion over the next four years. We will expand our teams and facilities in several states, including Michigan, Texas, California, Arizona, Nevada, Iowa, Oregon, North Carolina, and Washington.

We will also open a new advanced server manufacturing facility in Texas, USA. By 2025, we expect to source over 19 billion chips from over a dozen states, including tens of millions of advanced chips produced in Arizona this year. We also sourced glass used in iPhones from a U.S. company. In total, we have over 9,000 suppliers across all 50 states in the U.S.

Now, let me talk about products, starting with the iPhone. iPhone revenue was $46.8 billion, a year-over-year increase of 2%. This quarter, we launched the iPhone 16e, an outstanding entry-level new device in our iPhone 16 series. It features our latest generation A18 chip and includes Apple’s newly designed C1 modem, which is the most energy-efficient modem in iPhone history, giving the iPhone 16e the longest battery life of any 6.1-inch iPhone.

Meanwhile, iPhone 16 and iPhone 16 Plus users are exploring how to use camera controls, whether capturing stunning photos or using visual intelligence to explore the world. Our iPhone 16 Pro models continue to be favored by users. They feature the exceptional performance and efficiency of the A18 Pro, along with larger displays, advanced camera systems, and exquisite designs. Mac revenue was $7.9 billion, a year-over-year increase of 7%, marking another outstanding quarter for Mac.

This quarter, we brought significant updates to our product line. The world’s most popular laptop is now even better. The MacBook Air, powered by the M4 processor, features a 12-megapixel FaceTime HD camera with significant performance improvements. It now comes in a stunning new bright sky blue color

The all-new Mac Studio is the most powerful Mac we have ever launched, equipped with the M4 Mac and our brand new M3 Ultra chip. It is a true AI powerhouse, capable of running large language models with over 600 billion parameters entirely in memory. Apple Intelligence brings powerful features to the Mac, including writing tools and notification summaries, helping users stay focused and accomplish more work. For the iPad, revenue this quarter was $6.4 billion, a year-on-year increase of 15%, achieving double-digit strong growth once again.

Our iPad series continues to empower users to learn, work, entertain, and unleash their imagination anytime and anywhere. The all-new iPad Air, powered by M3 technology, combines powerful performance with exceptional portability, making it easy to handle whether you are navigating the streets or traveling the world. Apple Intelligence and Apple Pencil Pro are a match made in heaven, with features like cleaning tools and photos that eliminate distractions, while Image Wand and the Notes app can transform simple sketches into beautiful illustrations. Revenue from wearables, home, and accessories was $7.5 billion, a decrease of 5% compared to the same period last year.

From walkways to bike lanes, wherever you are, the Apple Watch Series 10 is an indispensable companion on your health and fitness journey. The AirPods 4, equipped with active noise cancellation, feature an open design that delivers an extraordinary experience. Users continually tell me that the hearing health features of AirPods Pro 2 are crucial for them, and we have been expanding the availability of these features to reach more users globally. Millions of users have taken hearing tests, and the touching stories we have received about this new hearing aid feature are moving, showcasing how these innovations are genuinely changing people's daily lives.

It powerfully reminds us of the profound impact that well-designed technology can have. Meanwhile, Apple Vision Pro, with our latest Apple immersive video Metallica, elevates the concert experience to a whole new level that you must see to believe. visionOS 2.4 unlocks the first batch of Apple Intelligence features for Vision Pro users, while inviting them to explore a curated, regularly updated collection of spatial experiences using the Spatial Gallery app. In retail, in addition to the two stores opened this quarter, we also look forward to opening a new retail store in the UAE, launching an online store in Saudi Arabia, and opening new retail stores in India later this year.

Now let's take a look at the services business, where we achieved a record revenue of $26.6 billion, a 12% increase year-on-year, with strong performance across all categories. From listening to your favorite podcasts in the morning, to buying a cup of coffee with Apple Pay, to reading the latest bestseller on Apple Books in the afternoon, to using your favorite apps in the App Store, Whether it's using Fitness+ for workouts in the evening, Apple services are enriching users' lives throughout the day. With outstanding shows like "The Studio," "Your Friends & Neighbors," and the culture-shaping "Severance," Apple TV+ has become a must-watch for users, achieving record viewership this quarter. We look forward to the upcoming film "F1," starring Brad Pitt, which will be released this summer and will take you deep into one of the most intense sports on Earth.

There's even more exciting content this year. It's no wonder that Apple TV+ has received over 2,500 award nominations and won 560 major awards. We are also engaging with sports fans in unprecedented ways. From watching their favorite teams' spectacular hits in Friday night baseball games to cheering for local teams using MLS season tickets, and following the results of every Formula 1 Grand Prix through the Apple Sports app.

On the software side, we have just released iOS 18.4, which brings Apple Intelligence to more languages, including French, German, Italian, Portuguese, Spanish, Japanese, Korean, and Simplified Chinese, as well as localized English for Singapore and India. Over the years, we have introduced many profound features, with artificial intelligence and machine learning at our core, aimed at helping our users lead better lives. This is why we equipped Apple Silicon with a neural engine, supporting numerous AI features in our products and third-party applications. This is also why Apple products have become the best devices for generating artificial intelligence. At WWDC 24, we announced Apple Intelligence and shared our vision of integrating generative AI into the applications and features that users rely on every day within our ecosystem.

To achieve this goal, we built our own high-performance foundational models specifically for everyday tasks. We designed practical features that are right where users need them and easy to use. We have gone to great lengths to build a system that protects users, whether requests are processed on-device or in the cloud using private cloud computing, marking an extraordinary step forward for privacy and AI. Since the launch of iOS 18, we have released many Apple Intelligence features, from practical writing tools to Genmoji, Image Playground, Image Wand, Clean Up, Visual Intelligence, and seamless integration with ChatGPT. We empower users to create movies from their memories with simple prompts and have added AI-driven photo search, smart replies, priority notifications, email summaries, and more. We have also expanded these features to more languages and regions

Regarding the more personalized Siri features we announced, we need more time to complete these features to meet our high-quality standards. We are making progress and look forward to delivering these features to users. Speaking of sustainability, we just celebrated Earth Day and are proud to announce that our emissions have been reduced by 60% compared to 2015.

Today, we use clean energy in our operations and incorporate more recycled materials in our products, being more efficient than ever. We have partnered with suppliers to implement 17.8 gigawatts of renewable power. We have also saved billions of gallons of fresh water and diverted millions of tons of waste from landfills. All of this will help us take significant steps toward achieving carbon neutrality in our supply chain and product lifecycle by 2030.

Now, let me introduce the impact of tariffs for the March quarter and briefly outline our expectations for the June quarter. Due to our ability to optimize the supply chain and inventory, the tariff impact for the March quarter was limited. Since we are uncertain about the measures that may be taken before the end of this quarter, we currently cannot accurately estimate the tariff impact for the June quarter. However, assuming that the current global tariff rates, policies, and applications remain unchanged for the remainder of this quarter, and no new tariffs are introduced, we estimate that tariffs will increase our costs by $900 million.

This estimate should not be applied to forecasts for future quarters, as certain unique factors favor the June quarter. For our part, we will continue to manage the company as always, making thoughtful decisions, focusing on long-term investments, and committing to innovation and its possibilities. Looking ahead, we remain confident that we will continue to create the best products and services in the world, that we have the ability to innovate and enrich users' lives, and that we can continue to operate our business in the uniquely Apple way. Next month, we can’t wait to welcome the developer community to the Worldwide Developers Conference, and we look forward to announcing some exciting news. Next, I will hand it over to Kevan.

Senior Vice President and Chief Financial Officer Kevan Parekh:

Thank you, Tim, and good afternoon, everyone. Despite foreign exchange factors having a nearly 2.5 percentage point adverse impact, our revenue for the March quarter still reached $95.4 billion, a year-over-year increase of 5%. Most of the markets we track also experienced growth.

Product revenue was $68.7 billion, a year-over-year increase of 3%, driven by growth in iPhone, iPad, and Mac sales. Thanks to our high levels of customer satisfaction and strong customer loyalty, the active device installations across all product categories and geographic regions reached an all-time high. Service revenue was $26.6 billion, a year-over-year increase of 12%, despite facing an adverse foreign exchange impact of over two percentage points. As Tim mentioned, this set a new record for revenue.

We also achieved growth in every geographic region, with double-digit growth in both developed and emerging markets. The company's gross margin was 47.1%, in the middle of our guidance range, and increased by 20 basis points from the previous quarter, primarily due to a favorable product mix The product gross margin was 35.9%, a decrease of 340 basis points from the previous quarter, primarily due to product mix, foreign exchange, and seasonal leverage losses. The service gross margin was 75.7%, an increase of 70 basis points from the previous quarter, mainly due to different product mixes, although the foreign exchange aspect offset this growth. Operating expenses reached $15.3 billion, a year-on-year increase of 6%. Net income was $24.8 billion, with diluted earnings per share of $1.65, an 8% year-on-year increase, setting a new high for the March quarter. Operating cash flow was also strong, reaching $24 billion. Now, I will provide more details on each of our revenue categories.

iPhone revenue was $46.8 billion, a year-on-year increase of 2%, driven by the iPhone 16 series. The active install base of iPhones reached an all-time high both overall and in each geographic region, with the number of iPhone upgrade users increasing by double digits year-on-year. According to a recent survey by Kantar, in the March quarter, the iPhone was the best-selling model in the United States, urban China, the United Kingdom, Germany, Australia, and Japan. Moreover, we continue to see high levels of customer satisfaction in the United States, with satisfaction reaching 97% according to 451 Research. Mac revenue was $7.9 billion, a year-on-year increase of 7%, driven by the latest MacBook Air, MacBook Pro, and Mac Mini models. This performance was broad-based, with year-on-year growth achieved in every geographic region. The Mac install base reached an all-time high, and we saw strong growth in both Mac upgrade users and new customers. Reportedly, customer satisfaction in the United States reached 95%. iPad revenue was $6.4 billion, a year-on-year increase of 15%, driven by the new iPad Air featuring the M3 processor. The iPad install base reached a new historical high, with over half of the customers purchasing iPads this quarter being new users. According to the latest report from 451 Research, customer satisfaction in the United States reached 97%. Revenue from wearables, home, and accessories was $7.5 billion, a year-on-year decrease of 5%.

It is important to note that we faced greater challenges compared to the Apple Vision Pro and Watch Ultra 2 launched in the same period last year. Meanwhile, the install base of the Apple Watch reached an all-time high, with over half of the customers purchasing an Apple Watch this quarter being first-time buyers. Customer satisfaction for the Apple Watch in the United States was recently measured at 95%. Our service revenue reached a historical high of $26.6 billion, a year-on-year increase of 12%.

This growth rate is comparable to the year-on-year growth rate of the December quarter (excluding negative foreign exchange impacts). In the March quarter, we demonstrated strong growth momentum, with the growth of the active device install base bringing significant opportunities for our future. Customer engagement across our various services also continued to improve. Both transaction accounts and paid accounts reached all-time highs, with paid accounts growing by double digits year-on-year

The number of paid subscriptions has also achieved double-digit growth. The paid subscriptions for various services on our platform have exceeded 1 billion. We continue to enhance the quality and breadth of our services, from new features in News+ to brand new games in Arcade. Apple Pay continues to provide our customers with convenient, secure, and private payment solutions, and we are pleased to see the number of active users of Apple Pay reach a historic high, with a year-on-year double-digit growth.

Turning to enterprises. Companies are increasing their investments in Apple products and services to enhance productivity and employee engagement. For example, KPMG recently launched the iPhone 16 for all its employees in the United States, reflecting their confidence in Apple’s security and privacy features. We also continue to see strong performance of Mac in the enterprise sector.

Nubank, the largest digital bank in Latin America, has chosen the MacBook Air as the standard computer for its thousands of employees. With the Vision Pro, major companies are continuously exploring innovative ways to leverage this technology. Dassault Systèmes, a leading provider of engineering and 3D design software, has natively integrated Apple Vision Pro into its next-generation platform, providing thousands of enterprise customers with powerful and immersive spatial experiences. Now, let’s take a look at our cash position and capital return plan.

At the end of this quarter, we held $133 billion in cash and marketable securities. We have $3 billion in debt maturing, and commercial paper increased by $4 billion, bringing total debt to $98 billion. Therefore, the net cash at the end of this quarter is $35 billion. This quarter, we returned $29 billion to shareholders.

This includes $3.8 billion in dividends and equivalents, as well as $25 billion obtained through the repurchase of 108 million shares of Apple stock in the open market. Given our continued confidence in current and future business, today, the board approved an additional $100 billion for stock repurchase to maintain our goal of achieving net cash neutrality. We also raised the dividend by 4% to $0.26 per share of common stock and will continue to plan for annual dividend increases, as we have done for the past 13 years. This cash dividend will be paid on May 15, 2025, to shareholders of record as of May 12, 2025.

As we enter the June quarter, I would like to review our outlook, including the forward-looking information mentioned by Suhasini. Importantly, the outlook we provide assumes that global tariff rates, policies, and applications remain effective at the time of this conference call, and that the global macroeconomic outlook does not deteriorate from today. Despite the overall uncertain environment, we will still provide guidance at the company level based on these assumptions and the risk factors mentioned at the beginning of the conference call. We expect total company revenue for the June quarter to grow year-on-year in the low single digits to mid-single digits. We expect gross margin to be between 45.5% and 46.5%, which includes the estimated impact of $900 million in tariff-related costs mentioned by Tim earlier. We expect operating expenses to be between $15.3 billion and $15.5 billion. We expect net income (OI&E), excluding the potential impact of market value adjustments for minority equity investments, to be approximately negative $300 million, with a tax rate of about 16% As for operating income and expenses (OI&E), we expect it to be approximately negative $300 million. Now let's start the Q&A session.

Suhasini Chandramouli, Director of Investor Relations:

Please ask only two questions. Operator, could you please ask the first question?

Operator:

Of course. Let's first address the question from Eric Woodring at Morgan Stanley.

Eric Woodring:

Great, thank you very much for answering my question.

Tim, I want to start with the tariff issue. You mentioned earlier on CNBC that currently 50% of iPhones in the U.S. come from India. What do you expect the share of iPhones made in India to be in U.S. sales by the end of this fiscal year?

Is your goal to source 100% of iPhones made in the U.S. from India? Can you help us understand how this trend might look after the second quarter? Then I have a follow-up question. Thank you.

CEO Tim Cook:

Yes, Eric.

Hi, I'm Tim. As you mentioned, the tariffs applicable to Apple are based on the country of origin of the products. For the second quarter, we expect that the majority of iPhones sold in the U.S. will have India as their country of origin, and almost all iPads, Macs, Apple Watches, and AirPods sold in the U.S. will have Vietnam as their country of origin. Additionally, to enhance transparency and clarity, the vast majority of our products, including iPhone, Mac, iPad, Apple Watch, and Vision Pro, are currently not subject to the global reciprocal tariff policy announced in April, as the U.S. Department of Commerce has initiated a Section 232 investigation into semiconductor imports (including semiconductor manufacturing equipment and downstream products containing semiconductors). Therefore, as I mentioned in my opening remarks, for the June quarter, we estimate that the impact (assuming current global tariff rates, policies, and applications remain unchanged) will result in a $900 million loss to our costs for the remainder of this quarter. I don't want to predict future production structures, but I want to clarify the country of origin for the June quarter so that you can use it for modeling.

Eric Woodring:

Okay, I appreciate your perspective. Thank you, Tim. Then I want to ask, there have been many reports this quarter that Apple accelerated channel sales to complete sales before the tariffs took effect. So, can you help us better understand or clarify whether the sales volume and sales conversion rate were consistent in the March quarter? Did you assume they would remain consistent in the guidance for the June quarter? Lastly, do you think consumers are accelerating hardware purchases to complete their purchases before any potential price increases, or is this behavior normal? Thank you very much, Tim.

CEO Tim Cook:

Yes, thank you for the question, Eric. There are several questions here. First, regarding demand acceleration, if you look at the March quarter, we do not see significant evidence that demand was significantly pulled forward in the March quarter due to tariffs If you look at our channel inventory, from the beginning of the quarter to the end of the quarter, the unit channel inventory is about the same, not just for the iPhone, but for our other products as well.

To emphasize again, for transparency, you will see that we have indeed built total inventory, which is reflected in our manufacturing procurement obligations, and you will see this in the quarterly report. I hope the above content can answer all your questions.

Eric Woodring:

Thank you very much, Tim, and good luck.

CEO Tim Cook: Thank you.

Suhasini Chandramouli, Director of Investor Relations:

Thank you, Erik. Operator, can we take the next question?

Operator:

The next question comes from Ben Reitzes of Melius. Please go ahead.

Ben Reitzes:

Hey, thank you very much.

Hey, Tim, if you had told me on April 2 that the tariff impact you faced was only 5 cents per quarter. Given the panic that followed, $900 million is quite a good result. I'm surprised the actual number is so low, but you did mention the situation after the June quarter. I'm sorry to press you, but is the actual number likely to be several times that figure, or is it completely unknown? We're all trying to figure out what will happen after June, and if you could provide some guidance, whether it's larger, smaller, or something else, I hope you can explain a bit. Thank you.

CEO Tim Cook:

Yes, Ben, thank you for your question. In the previous question, I tried to give you some information about the country of origin, which is currently the key factor in determining the tariffs we pay. I don't want to predict the future because I'm not sure what will happen with tariffs, and there is currently a Section 232 investigation underway, so it's hard to predict what will happen after June, and the June situation includes the assumptions I mentioned earlier.

Ben Reitzes:

Thank you very much, Tim.

CEO Tim Cook:

Yes. Thank you, Ben.

Suhasini Chandramouli, Director of Investor Relations:

Thank you, Ben. Operator, can we move on to the next question?

Operator:

The next question comes from Michael Ng of Goldman Sachs.

Please go ahead.

Michael Ng:

Hello. Good afternoon. Thank you very much for your question.

I just wanted to know if you could talk about your response to some trade policy uncertainties. I appreciate your transparency in inventory building. Will you continue to maintain this transparency during this transition period until the results of the Section 232 investigation are clear? Could you talk about your philosophy on pricing based on actual costs? Whether for dealers or end consumers, and any other efficiency measures you might take? Thank you

CEO Tim Cook:

Yes, clearly we are very focused on the tariff discussions.

We believe in the importance of engagement and will continue to stay engaged. Regarding pricing, we have nothing to announce today. I just want to say that the operations team has done an excellent job optimizing the inventory supply chain. We will certainly do our best to continue this work.

Michael Ng:

Great, thank you. Regarding product gross margins, I want to quickly follow up on Kevan's question. Can you elaborate on some factors that might affect product gross margins this quarter? Clearly, there has been a quarter-over-quarter decline in product gross margins due to seasonal factors, but there has also been a year-over-year decline.

So, any new colors would help. Thank you.

Senior Vice President and Chief Financial Officer Kevan Parekh: Yes, Michael. Thank you.

I'm Kevan. As we mentioned in our prepared remarks, our product gross margins decreased by 340 basis points quarter-over-quarter. This was primarily due to the impact of seasonal leverage losses in the exchange, but cost savings partially offset this impact. Year-over-year, our product gross margins decreased by 70 basis points.

This is due to different foreign exchange combinations.

Michael Ng:

Thank you.

Senior Vice President and Chief Financial Officer Kevan Parekh: Thank you.

Director of Investor Relations Suhasini Chandramouli: Great.

Thank you, Mike. Operator, can we move on to the next question?

Operator:

The next question comes from Amit Daryanani of Evercore. Please go ahead.

Amit Daryanani:

Thank you, Laura.

I think I have to start with the tariff issue as well. Tim, I think when you talked about the $900 million impact on your cost of sales, you mentioned that there were some unique factors related to that number that were favorable for you in the June quarter. Can you talk about what those unique factors were that were favorable for you in the June quarter? What would the impact have been without those factors?

Unidentified Speaker:

I don’t want to go through them one by one, but as an example, the early builds in the manufacturing procurement obligations I mentioned earlier are more helpful.

Amit Daryanani:

Got it.

Given the low to mid-single-digit revenue growth expectations for the June quarter, do you expect the growth in the services business to remain around double digits in the second half? I think foreign exchange factors will be somewhat favorable in the second half. Within that framework, how do you think the services business performed in the June quarter?

Senior Vice President and Chief Financial Officer Kevan Parekh:

Yes, Kevin, I have to tell you. So, when we talk about the entire June quarter, we are discussing low to mid-single-digit growth year-over-year. We do expect the foreign exchange rates for the June quarter to improve quarter-over-quarter

However, we expect this to have a slight negative impact on year-over-year revenue. In terms of services, given the uncertainty brought about by various factors we have observed, we are currently not providing category-level information.

Amit Daryanani:

Understood. Thank you.

Senior Vice President and Chief Financial Officer Kevan Parekh: Thank you.

Unknown Speaker:

Thank you, Amit. Operator, may we ask the next question?

Operator:

The next question comes from Wamsi Mohan of Bank of America. Please go ahead.

Wamsi Mohan:

Yes, thank you. Tim or Kevan, as you increase the components sourced from the U.S., or the other supply chain changes you are making (including in India), how should investors view the trend in gross margins? How should these changes affect the cost structure? How should we think about the trend in gross margins? I will follow up.

CEO Tim Cook:

We are pleased to shift more production to the U.S. As you know, we play a critical role in the TSMC project in Arizona, being the largest customer of that project and the first to receive products from there, and SFC is produced from there. Our Face ID modules and a large number of chips are also imported from the U.S.

In fact, there are currently 19 billion chips being produced across 12 states. This clearly depends on the levels of resistors and capacitors. Therefore, as Kevan mentioned, some factors have already been accounted for in the margins, and as you know, we currently cannot predict what will happen after this quarter.

Senior Vice President and Chief Financial Officer Kevan Parekh:

Yes, as we consider future margins, perhaps I would like to add a few more points.

I want to make a few observations: each product cycle is different. Over the years, we have managed to maintain good gross margins. We have made prudent decisions in balancing unit revenue margins. When we launch new products, their cost structure is often higher than that of the products they replace.

As we introduce new features and technologies, we indeed have a good track record of reducing costs and structures over the product lifecycle. Our products and services have different levels of profitability, and relative success in the market will affect overall gross margins. So, I hope the above information is helpful to you.

Wamsi Mohan:

Yes, no, this is very helpful.

Thank you. I think you just mentioned that, given some uncertain news, you would not provide growth forecasts for services. However, Tim, could you share what you have observed regarding developer behavior in regions like Europe? There are now some alternative app stores emerging in those regions, and this phenomenon has been ongoing for a while. What aspects of developer behavior have you observed from anecdotes or data, regardless of their size? Can you share the actual situation?

CEO Tim Cook:

As Kevan mentioned earlier, it has been integrated into our performance and into the overall image of our company. But as you know, the Digital Markets Act came into effect last March. The Digital Markets Act has been in place for over a year now, and during this time, some alternative app stores have also been around for a while. So, currently in Europe, there is already some data in the actual figures. There may be more data in the future, and so on. I don't want to predict what will happen after this quarter.

Wamsi Mohan:

Okay, thank you, Tim.

Suhasini Chandramouli, Director of Investor Relations:

Thank you, Wamsi. Operator, can we move on to the next question?

Operator:

Our next question comes from David Vogt of UBS. Please go ahead.

David Vogt: Great.

Thank you, everyone. Thank you for answering my questions. I have two questions. Tim, this is a more macro supply chain philosophy question. So, could you update your thoughts on the company's resilience and redundancy after the changes discussed in the previous call? What I want to understand is how you view your supply chain two to three years from now? Do you see any risks in your outlook for the remainder of this year? At least in the short term, are there any risks related to export controls? I will also ask the second question. You quantified a $900 million tariff loss. However, Kevan, your thoughts on the demand backdrop in the June quarter outlook, will that have an impact on overall revenue? Thank you.

CEO Tim Cook:

In terms of resilience and risks, our supply chain is complex.

There are always risks in the supply chain. So I won't tell you anything different. Our previous experience has shown that putting everything in one place is too risky. So, over time, we have opened up new sources of supply in certain parts of the supply chain (not the entire supply chain, but certain parts of it).

And you can see that this kind of thing will continue to happen in the future. I'll let Kevan address the other question.

Senior Vice President and Chief Financial Officer Kevan Parekh:

Hi, David. Regarding the other question, I want to say that our best ideas are reflected in the outlook we provide.

However, I do want to emphasize again that the assumptions we made for the outlook are that, as of this call, global tariff rates, policies, and applications remain unchanged from today, and that the global macroeconomic outlook does not deteriorate from today.

David Vogt:

Okay, but so far, at least from last month, there hasn't been a quantifiable impact on demand? Is there any way to predict from early April to early May?

Senior Vice President and Chief Financial Officer Kevan Parekh:

I want to say that our best ideas are reflected in the range we provide.

David Vogt:

Okay, thank you, Kevin. Thank you, everyone.

Senior Vice President and Chief Financial Officer Kevan Parekh: Thank you.

Suhasini Chandramouli, Director of Investor Relations:

Thank you, David. Operator, can we move on to the next question?

Operator:

The next question comes from Samik Chatterjee of JP Morgan. Please go ahead.

Samik Chatterjee:

Good afternoon, everyone. Thank you for taking my question. Tim, I believe you mentioned in the last earnings call that Apple Intelligence has had a significant impact on iPhone sales in the countries/regions where it has been launched. I'm just curious, as Apple Intelligence rolls out in more countries/regions, will you continue to see a similar impact? Or has the delay in the Siri personalization feature you mentioned affected consumers' willingness to upgrade? I have a follow-up question as well. Thank you.

CEO Tim Cook:

Yes, thank you for your question. In the March quarter, we found that in markets where Apple Intelligence has been launched, the year-over-year performance of the iPhone 16 series was stronger than in markets where Apple Intelligence has not been launched. I think many of the language versions you mentioned were launched in April, so they actually rolled out in the third quarter.

Samik Chatterjee:

Okay, got it. Yes, so next I want to ask, what is your current view on consumers, and you have a lot of insights into how consumers are reacting to the overall macroeconomic situation. I know you emphasized at the beginning of all the guidance that the macroeconomic environment will remain consistent. However, how do you see the situation of American consumers? How are they reacting to the impact of tariffs? Or, we see that U.S. GDP has also contracted. When you look at the sales pace in stores, or when purchasing at discounted prices in the iPhone portfolio, how do you see consumers currently reacting to the macroeconomic situation? Thank you.

Unidentified Speaker:

I'm not an economist, so I want to say first that from a company-wide perspective, our performance grew by 5% quarter-over-quarter, and the U.S. clearly accounts for the vast majority of our business in the Americas, and you can also see the performance in the Americas this quarter, and that's all I want to say about that. I don't want to predict what will happen in a few months, but in terms of the past, I am quite satisfied with the performance in the second quarter.

Samik Chatterjee:

Thank you. I appreciate you answering these questions.

Unidentified Speaker:

Thank you, Samik. Operator, can we take the next question?

Operator:

Our next question comes from Krish Sankar of TD Cowen.

Please go ahead.

Krish Sankar:

Yes, hi, thank you for taking my question. I told them, Tim, thank you for the information regarding the $500 billion investment in the U.S. I'm a bit curious about the composition of this investment.

What are the capital expenditures and R&D expenditures respectively? What is the investment in Texas servers? And what about the investment in TSMC's Arizona facility? Could you elaborate on this $500 billion investment and then provide some follow-up details?

CEO Tim Cook:

Well, I would say there is a lot. We won't disclose the specific breakdown, but as we expand our factories in different states like Michigan, Texas, California, Arizona, Nevada, Iowa, Oregon, North Carolina, and Washington, it will involve both capital expenditures and operational expenditures. Establishing servers in Texas and building an advanced server manufacturing base will be done through partners, just like we do manufacturing through partners.

But we will invest a significant portion of the sales cost, as well as some operational expenditures, and I believe there will also be some capital expenditures. So, it may include all factors.

Krish Sankar:

Got it, got it. I wasn't trying to ask a long-term question, more like a philosophical one.

Looking back, we've discussed edge computing in AI. Clearly, from the perspective of the iPhone and Mac, this is a very hot topic for you, but I'm just a bit curious to see how edge computing in AI is shaping up. Are the current smartphone specifications, including hardware and chip specifications, sufficient to meet the inference needs of future edge computing LLMs? Or do you think we need to develop an entirely new device? We're curious about how edge devices will evolve from now on. Thank you.

CEO Tim Cook:

Yes, as you know, we will launch the LLM version on the iPhone 16. Some of the queries our customers use are done on-device, while some are routed to private clouds, where we essentially simulate the security and privacy of the device in the cloud, along with some queries for global knowledge. With the integration with ChatGPT, we are very excited about the opportunities here. We are very excited about the roadmap, and we are pleased with the progress being made.

Krish Sankar:

Thank you, Tim.

Suhasini Chandramouli, Director of Investor Relations:

Thank you, Krish. Operator, may we take the next question?

Operator:

The next question comes from Richard Kramer of Arete Research. Please go ahead

Richard Kramer:

Thank you very much. I won't ask about tariffs. Tim, given that you acknowledge the delivery time for an important new system is longer than you expected, I want to revisit the question from the last conference call and ask what lessons you have learned from these delays, and whether you attribute them to organizational factors of your existing system. Or is it a matter of R&D spending? What key profit factors should investors focus on at WWDC or afterward? Do you think Apple can deliver on some of the promises made at the last WWDC? Thank you.

CEO Tim Cook:

Yes, if you look back at what we discussed at WWDC, we talked about a lot of different features. One of them is that it will launch with iOS 18, and we have released a range of features, from writing tools to seamless connections to ChatGPT, Genmoji, Image Playground, Image Wand, Clean Up, and Visual Intelligence (creating movies or capturing memories with simple prompts), AI-driven photo search, smart replies, priority notifications, and more. We have delivered a lot of features, and just a few weeks ago, we expanded it to several different language versions, including French, German, Italian, Portuguese, Spanish, Japanese, Korean, Simplified Chinese, and localized English versions for Singapore and India.

So we have delivered a lot. However, as you mentioned, for a more personalized Siri, we just need more time to get it done to meet our high-quality standards. The reasons are few; it just takes a bit longer than we anticipated.

But we are making progress, and we are very excited to launch the more personalized Siri features.

Anonymous Speaker:

Richard, regarding your question about investment, I just want to add that we do not underestimate the investment in our business. We are investing heavily in R&D, and that investment continues to grow. We are continuously increasing our R&D spending.

Therefore, we will definitely make all the investments we believe are necessary to achieve our roadmap.

Richard Kramer:

Thank you. Kevan, I want to ask you a question. I mean, it's hard to ignore some ongoing, high-profile legal cases involving Apple, whether it's yesterday's Epic injunction case or the Google antitrust case regarding default search.

Investors are clearly concerned that these measures could have a significant impact on Apple's services business. Do you think there are now sufficient measures to mitigate some of the negative impacts that Apple's services business may face, which could arise from proposed measures or from legal pressures rather than commercial pressures?

Anonymous Speaker:

Let me make a few comments on this in front of Kevin. We strongly oppose yesterday's case. We have complied with the court's order and will appeal

As for the case between the Department of Justice and Google that you mentioned, the case is still under review, and I have nothing to add beyond that. We are closely monitoring these developments. But as you pointed out, there are risks associated with these cases, and the outcomes remain uncertain.

Senior Vice President and Chief Financial Officer Kevan Parekh: Yes, I think Tim answered that very well.

I have nothing to add to that.

Richard Kramer:

Thank you.

Unidentified Speaker:

Okay. Thank you, Richard.

Operator, please take our last question.

Operator:

We will now take the last question from Aaron Rakers of Wells Fargo. Please go ahead.

Aaron Rakers:

Yes, thank you for taking this question.

I want to go back a bit to the AI strategy. Tim, I know you mentioned in your prepared remarks about building some of your own foundational models. I'm curious how important you think it is for Apple to have its own foundational models and to align with them? When we see Apple spending up to $3 billion each quarter, while some other companies are spending multiples of that, how do you view Apple's data center layout? How do you think Apple's strategy is being implemented?

CEO Tim Cook:

In terms of data centers, we take a hybrid approach, and in addition to our ongoing data center investments, we also leverage third parties. As I mentioned in the $500 billion investment, we are expanding into many states. Some of these are data center investments. So we do plan to invest in this area, and we will not limit its development. As Kevan said, we invest in the business first, which is our most important thing. Regarding foundational models, we want to have certain models, and we will also collaborate. So I don't think it's a collection of one or all models.

We have been working on foundational models for quite some time, and today we are releasing some models, which obviously include models on devices and in private cloud computing.

Aaron Rakers:

Yes. Then as a follow-up, I'm curious if the iPhone 16e launching this quarter will have your C1 modem built-in, and I'm curious how you view the implementation of the modem strategy, or perhaps just the continued deepening of Apple's internal chip opportunities.

CEO Tim Cook:

We are very excited to launch the first product, and everything is progressing smoothly.

We are very pleased to produce better products from the perspective of truly focusing on battery life and other customer needs. So let me put it this way, we have embarked on a journey.

Aaron Rakers:

Thank you.

CEO Tim Cook: Yes

Suhasini Chandramouli, Director of Investor Relations:

Thank you, Aaron. Today's conference call replay will be available as a live stream on Apple Podcasts at apple.com/investor and via phone for two weeks. The phone replay number is 866-583-1035. Please enter the confirmation code 372-9688, then press the pound key.

These replays will be available today around 5 PM Pacific Time. Media reporters with additional questions may contact Josh Rosenstock at 408-862-1142; financial analysts with further inquiries may contact me, Suhasini Chandramouli, at 408-974-3123. Thank you again for joining us today.

Operator:

Today's meeting has now concluded.

Thank you very much for your participation. The event has ended.

This article was translated with the assistance of AI, with some parts omitted