Apple released its second quarter financial report for fiscal year 2026. Driven by the growth of its services business, both profit and revenue exceeded analyst expectations. iPhone sales fell short of market expectations for the second time in the past three quarters, and it was the only core performance data in Thursday's earnings report that was significantly lower than expected. (Note: Apple’s fiscal year is not consistent with the calendar year) After the release of the financial report, Apple’s management held a conference call. Apple CEO Tim Cook and Chief Financial Officer Kevan Parekh attended the meeting and answered questions from analysts.
The following is the main content of the analyst Q&A session of this conference call:
Morgan Stanley analyst Erik Woodring:Tim, I'll save my goodbyes for next quarter. It was a pleasure working with you. My first question is, could you please talk a little bit more about what you mean by "constrained supply" in the previous 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 also reflect supply constraints on these product lines? Or is it that the current guidance for the June quarter is an ideal expectation given under the condition of "unconstrained supply"?
Tim Cook:In the March quarter, we did have an impact from supply constraints, primarily on iPhone and to a relatively minor extent on Mac. As we mentioned in our last conference call, the limitations mainly come from the advanced process capacity that our chips rely on.
Looking ahead to the June quarter, the user demand we are currently seeing is still at a high level, and we believe supply constraints will be concentrated on some Mac models. Overall, our supply chain flexibility will be slightly lower than in the past.
Specifically, for Mac supply constraints in the June quarter, I think there are two main factors. First, both Mac mini and Mac Studio are excellent AI and intelligent agent tool platforms. Users' recognition of this is much higher than we expected, so the overall product demand is higher than expected. Second, the market's response to MacBook Neo is extremely enthusiastic, and product demand also exceeds expectations.We saw a record number of new Mac product users (first-time Mac buyers) in the March quarter, driven by MacBook Neo.
Looking to the future, weIt's expected that both the Mac mini and Mac Studio may take several months to balance supply and demand.Hopefully this information will help give you a sense of where we are on the supply side in our fiscal second quarter and fiscal third quarter.
Morgan Stanley analyst Erik Woodring:My second question is for Kevin. In the briefing just now, you mentioned that the company's current "net cash tends to be neutral" (net-zero status). In the future, the company will no longer disclose "net cash" to everyone as a formal item. Could you please expand on this a little bit? For example, in terms of the company's capital return policy, has the management considered making adjustments? It doesn't look like it's there at the moment, but can management please share a few more details with us? In addition, when management mentioned “investments” in the briefing, were these investments used for organic growth or external mergers and acquisitions? Could you please tell us more about it?
Kevin Parekh:Let me further explain to you what we mentioned in the briefing. This is actually our explanation of the company's capital structure. Our goal of "adjusted net cash to net zero" has been working very well. It has been a very valuable framework indicator for the company and our capital structure since 2018.
But so far, we believe that the company has reached a new stage. "Evaluating cash and debt separately" is a more appropriate approach for us, which will also help us make better decisions in using a combination of debt and cash to support the business. In other words, we can allocate funds more flexibly according to business needs and market environment. At the same time, we also believe that while maintaining this flexibility, we can still operate efficiently and maintain a consistent prudent attitude.
On this basis, Apple remains committed to returning excess cash to shareholders. As we mentioned before, for Apple, investment in the business still comes first, followed by returning remaining cash to shareholders. I think we have always maintained a good efficiency and prudent attitude in this regard:Since the program began, we have returned more than $1 trillion to shareholders, including more than $850 billion through share repurchases.Additionally, we increased our stock repurchase authorization by $100 billion.
I believe you can see that return on capital is always very important to us. As we mentioned in previous briefings, this is an important part of our strategy to deliver long-term shareholder value.
Melius Research analyst Ben Reitzes:My first question is, there's been a lot of talk about "proxy smartphones" in the market lately. To be honest, I'm not sure what exactly this refers to. However, I have seen some opinions mention that with the development of cutting-edge AI technology, AI agents may promote the development of smartphones and may even change the form of mobile phones.
So I would like to ask the management, with the rise of these "AI agents", how do you understand this trend? Does this mean that new product forms will appear in the future? Or will the emergence of “AI agents” fundamentally change the industry landscape? Or on a more macro level, what are your thoughts on this trend?
Tim Cook:We won't be specific about our future product roadmap, and I don't want to share too much information with you in this regard. But I can say pros and cons, we are very satisfied with the performance of iPhone products. This fiscal quarter, iPhone products achieved 22% growth, which continues our strong performance in the first fiscal quarter. From last year's new product launches to this year's March quarter, this has been arguably the strongest product cycle in our history, and we couldn't be happier with it.
Melius Research analyst Ben Reitzes:Regarding the supply constraints and other issues just mentioned, Tim, I have a follow-up question. What everyone is worried about in the market right now is, after the next June quarter, how do you think the profit margin of the product will change, taking into account component costs, industry trends and these supply constraints? Does the management have any macro ideas or principles that can help us understand future product profit trends?
In addition, maybe Kevin can also add, does management believe that the current profit model will see greater fluctuations in the future? Or can the gross profit margin be maintained in the range of 47% to 48% in the future? Or is it that the management believes that the situation after June is unclear and cannot make a clear judgment for the time being? It would be very helpful to us if the management could give us some directional guidance from a full-year perspective.
Tim Cook:Let me talk specifically about the issue of memory supply. I think this is actually the core of your question. Let me start with December last year and briefly outline the timeline for you.
In the December quarter of last year, the impact of memory prices on us was actually relatively small, which you can also see from the gross profit margin performance. We mentioned at the time that the impact of memory on us would increase in the March quarter, and this is actually the case. In the March quarter of this year, memory costs did increase, but some of the cost increase was offset by the gains from our inventory carryover.
Looking ahead to the June quarter, which is what Kevin just mentioned in the guidance, we expect that memory costs will increase significantly, but there will also be some costs that will be offset by the proceeds from the inventory carryover. As for the situation after June, we have not given more specific guidance. But what I can tell you is that we believe that after June, the impact of memory costs on our business will gradually increase. We will continue to evaluate the industry situation and, as stated previously, consider various response options.
Goldman Sachs analyst Michael Ng:My first question is, with the successful launch of MacBook Neo, can you ask the management to talk about how this product helps Apple increase product penetration among new user groups? For example, the education market, price-sensitive users, or emerging markets. Also, from a more 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 the above markets?
Tim Cook:Currently, our supply of MacBook Neo products is limited. Market feedback has been very strong. In fact, we were already very optimistic about the product before it was released, but the actual market enthusiasm still exceeded our expectations.
One of the core goals of this product is to enable Mac to reach more user groups. We focus on two types of users: one is new users who are using Mac products for the first time; the other is old users who have not changed their devices for a long time. So far, we are doing very well in both areas. As Kevin mentioned earlier, some schools, such as Kansas City Public Schools, are replacing school computers from Chromebooks and Windows PCs to MacBook Neo. I'm hearing more and more of similar cases, not just in school systems, but also from many individual consumers.
Overall, we are very pleased with the progress so far.
Goldman Sachs analyst Michael Ng:My second question is about advertising in Apple's services business. I would like to ask the management. Apple added some new advertising spaces in the App Store earlier this year. Did these new advertising inventories make a significant contribution to the growth and better-than-expected performance of the services business this quarter?
Also, can you ask management to talk about your advertising strategy? Especially this summer, Apple plans to introduce advertising content into the Maps application. In this regard, how does the management consider the overall layout?
Kevin Parekh:In terms of advertising business, our advertising business did achieve year-over-year growth. As you mentioned, we recently introduced more ad placements in App Store search results, providing developers with more advertising formats that allow users to drive app downloads on a platform they trust.
In addition, as you said, this summer we will introduce advertising services in key search and discovery scenarios in Apple Maps in the United States and Canada, providing local merchants with a new way to reach customers and help users explore new places and new locations.
At the same time, I want to emphasize that we believe that we can help businesses of all sizes grow through advertising services while still providing users with an excellent experience while respecting their basic privacy rights. These points are equally important to us.
Bank of America Merrill Lynch analyst Wamsi Mohan:Tim, you just mentioned that after the June quarter, the impact of memory costs will further increase, and you have advantages in terms of scale, supply chain efficiency and long-term established relationships. Based on this, when management is thinking about product positioning and pricing strategies with competitors, during the current period of volatility, will Apple's strategic focus be more focused on competing for market share? For example, not raising prices when competitors are under pressure, or even adopting a more aggressive strategy in the mass product line? Or will management focus more on maintaining profitability? In other words, how does management want us to understand the company's decisions at this current stage?
Tim Cook:As memory costs rise, we continue to evaluate a range of solutions. I don't want to say more about this at the moment.
Bank of America Merrill Lynch analyst Wamsi Mohan:I have a follow-up question. In the context of "agent AI", how does Apple think about its future monetization path? I would also like to combine Ben’s question just now, which aspects of the technology stack do management think Apple will focus on? Which jobs will be done more in-house? Which ones will be achieved with the help of partners?
At present, we have seen the company’s preliminary layout in some cooperative relationships. In the longer term, in what areas will Apple increase investment in the next few years? Also, is this related to what you mentioned earlier about "no longer working to adjust to net cash net zero"? For example, in order to welcome the future "AI-centered" era, does the management plan to further build related infrastructure?
Tim Cook:Obviously, we will increase investment, which you can also see from our operating expenses data. Looking further, if you look at R&D expenses, sales and administrative expenses separately, you will find that the growth rate of our R&D expenses is even significantly faster than the overall growth rate of the company.
It can be seen that we are indeed continuing to increase investment in both products and services, and we see growth opportunities in both areas. We are very excited about what the future holds.
Kevin Parekh:I would like to add one more point. As we have said all along, we believe that AI is one of Apple's very important investment directions. We will make regular investments in the roadmap of existing products, in addition toGradually increase investment in AI.
Evercore ISI analyst Amit Daryanani:My first question is still going back to the performance of iPhone products. In the past few quarters, despite supply constraints, the company has still achieved growth of over 20%. And judging by the guidance given by management, this trend appears to continue in the June quarter.
I'd like to ask management to dig a little deeper for us: What are the key drivers of such strong iPhone growth amid the current supply constraints? Also, how do you think about the sustainability of this growth?
Tim Cook:If you look closely, you will find that what drives our growth is the iPhone 17 series. As you said, this growth is happening against the backdrop of supply constraints that we face.The factors that drive users to choose the iPhone 17 series probably include: users like its design, performance, durability, camera functions, the "center stage" function, and the deep integration of Apple Intelligence in the entire ecosystem.
Looking at specific growth markets, our performance in each market has been very strong: most of the markets we focus on have achieved double-digit growth, including the United States, Latin America, Greater China, Western Europe, India, Japan and Southeast Asia. At the same time, data shows that the number of users who replaced their phones in the March quarter also hit a new record.
One of the key factors driving this is user satisfaction. Taking the US market as an example, the user satisfaction rate of the iPhone 17 series reaches 99%. Such a number is very rare. So we're very happy with the current situation.
Evercore ISI analyst Amit Daryanani:Tim, I think you'll probably be on another earnings call next. I'd love for you to talk a little bit about the upcoming handover.
You always mention the advice Steve gave you when you took over. I may not remember it particularly accurately, but the general idea was: "Don't think about what I would do, just do what you think is right." In my opinion, this advice has had a very positive effect on both Apple and shareholders over the past 15 years. I also want to know, what advice would you give John Ternus (Apple’s new CEO) now? Help him shape a new chapter for the company's future while continuing Apple's existing strengths?
Tim Cook:In my opinion, the advice Steve Jobs gave me back then really reduced my stress a lot. For me, this advice has served me well over the past 15 years.
As for John, my advice to him, or I've said to him, is that one of the most important decisions he needs to make is how to allocate his time. Personally, I invest my time in things that are most valuable to the company and users.At the same time, never forget the company’s “North Star” and its most fundamental mission. For Apple, our "North Star" is to create the best products in the world and truly enrich users' lives. If you can always think and make decisions around this, it will naturally lead to excellent results, and it will also give us the ability to continue to build more products, ultimately forming a positive cycle.
UBS analyst David Vogt:Tim, I want to go back to the supply chain issue. I didn't seem to hear it in the management briefing or the answer just now, are you sure that iPhone products will definitely be supply-constrained in the June quarter? If so, could you please talk more specifically about how management views Apple's ability to secure supply? Not only chip supply, but also memory supply. Is management currently considering memory supply sources other than traditional partners?
In addition, it seems that as Apple continues to increase its market share, why do you think the supply of iPhones will not be significantly restricted? How does management maintain confidence?
Tim Cook:It currently appears that the supply constraints in the March quarter and June quarter mainly come from the advanced process node capacity we use to produce chips, rather than memory.
As for whether supply and demand can match in the future, I don't want to make a prediction today. But looking at the reality, in terms of the supply of Mac mini and Mac Studio, I think it may take several months to balance supply and demand. At this time, we do not believe that the current tight situation will end in the short term, but this is not because of anything wrong with supply, but because we underestimated market demand. As you can see, there is a certain lead time involved, and it will take time to improve this supply and demand mismatch.
From a product perspective, in the June quarter, the main supply constraints will be concentrated on the Mac product line, including Mac mini, Mac Studio and MacBook Neo. The restrictions will basically be around these products.
UBS analyst David Vogt:I have a follow-up question about Apple's services business. The company's services gross margin performance was once again quite strong. Considering the product mix within the services business and the fact that many different businesses are achieving double-digit growth, does management believe that business growth is approaching a "cap"? In other words, do you think it's going to be increasingly difficult from a profitability perspective to scale further?
Or, for some specific businesses, management believes that it can still continue to bring about profit improvements through economies of scale? Or in some business categories, management believes that it can continue to drive the gross profit margin of the entire service business up by reducing losses?
Kevin Parekh:As you can see, our services business portfolio covers many different types of businesses, each with different business models, profitability and growth rates. At any point in time, the development and changes of these businesses will have an impact on the company's overall gross profit margin.
For now, the gross profit margin of our service business in the second fiscal quarter has increased by 20 basis points quarter-on-quarter, which is mainly caused by changes in business structure. However, it is difficult to predict how this situation will evolve in the future.
Overall, we are very satisfied with the current performance. There are indeed some service businesses whose profitability is improving after expanding in scale. But I also want to emphasize again that Apple has a very diversified business portfolio, and different businesses have different characteristics and will grow at different rates.
JP Morgan analyst Samik Chatterjee:Tim, my first question is that last quarter you mentioned Apple's basic models (Apple Foundational Models) and the "dual-track strategy", that is, on the one hand, it cooperates with Google, and on the other hand, it continues to promote self-developed models within the company.
Could you please share with us the latest progress? How does management currently balance these two paths? In addition, does the management believe that it is necessary to further increase investment and promote these two key tasks at the same time?
Tim Cook:This question is particularly good. We are indeed increasing investment, which you can see from operating expenses. As I mentioned before, our R&D spending has grown quite significantly year over year. Our cooperation with Google is currently progressing smoothly, and we are satisfied with the current situation; at the same time, we are equally excited about the progress of the company's independent advancement.
JP Morgan analyst Samik Chatterjee:I have a follow-up question. Kevin, compared with the past few years (at least the last two years), the month-on-month decline in product gross profit margin this year has been significantly milder. Is this primarily driven by product mix changes? Or is there also a tailwind from the exchange rate? Could you please break it down for us and see how this year's gross profit margin performance is different from previous models? In addition, could you please break it down for us in detail, what is the approximate impact of exchange rates on gross profit margin this fiscal quarter?
Kevin Parekh:On the product side, in the fiscal second quarter, our product gross margin declined approximately 200 basis points sequentially, and as Tim mentioned earlier, this was primarily due to the weakening of seasonal scale effects and rising memory costs.
However, if you look at it from a more macro perspective and want to understand the driving factors for changes in the company's overall gross profit margin, I can briefly sort it out. Overall, the company's gross profit margin increased by 110 basis points month-on-month, mainly due to the positive business structure and the decline in tariff-related costs, but it was also partially offset by the weakening of seasonal scale effects and rising memory costs.
As for the reduction in tariff costs, this question will be answered by Tim, who will provide additional explanations to provide you with more background and explanation.
Tim Cook:In the March quarter, our gross profit margin of 49.3% already includes the impact of tariff-related costs. However, tariff costs decreased in the March quarter compared with last year's December quarter, mainly due to a sequential decrease in product shipments from the first quarter to the second quarter. In addition, we also benefited from two tailwinds: First, the reduction in IEEPA tariff rates had a positive impact on the entire quarter, and second, the implementation of "Section 122" prompted a reduction in global tariff rates.
As for customs duty refunds, we are applying for them in accordance with the established procedures. Once the funds are received, we plan to reinvest them into U.S. innovation and advanced manufacturing. This part of the funds will be new investment and a further investment based on the investment in the United States that we have previously committed.
Kevin Parekh:Finally, I would like to add something about the exchange rate impact you mentioned. From the first fiscal quarter to the second fiscal quarter, foreign exchange factors basically had no sequential impact on gross profit margin.
Wells Fargo analyst Aaron Rakers:My question is about the end market situation. Tim, can you talk a little bit about what you're seeing in the Chinese market? From the perspective of market competition, have you observed that the impact of supply constraints on competitors has actually brought you certain advantages? In addition, from an overall perspective, what are your views on the Chinese market?
Tim Cook:We are very pleased with Apple's performance in Greater China. In the first half of the year, we achieved 33% growth; in the March quarter, revenue grew 28% year over year, setting a new quarterly revenue record for us. Behind this performance is mainly driven by the iPhone. iPhone sales in the Chinese market also set a new record for the March quarter. From a single product perspective, the iPhone is the best-selling model in China’s urban market; the Mac mini is the best-selling desktop computer in China; and the MacBook Air is the best-selling laptop.
Overall, our performance in each product line is very good. I also went to China in March this year, and the store traffic at that time achieved double-digit growth. We also celebrated Apple’s 50th anniversary in Chengdu, China, and it felt great to be a part of the local community.
Overall, I am very satisfied with our performance in the Chinese market in the first half of this year.
Wells Fargo analyst Aaron Rakers:My second question is similar to the previous one, about Apple's performance in the Indian market. The Indian market has been one of management's focuses during the past few quarterly calls. How does management view changes in the Indian market? For example, how does management think the iPhone user base will grow in the Indian market? What opportunities do you see as India's middle class rises? In short, in India, a huge mobile phone market, how will management evaluate the overall growth space and opportunities?
Tim Cook:I think the Indian market represents a huge opportunity for us. We have been investing continuously in the local market for some time.
India is the world's second largest smartphone market and the third largest PC market. Although we have achieved quite good results locally, our market share is not high, which just shows that we have great 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. Looking at each product line, whether it is iPhone, Mac, iPad or Apple Watch, in the Indian market, most consumers are first-time buyers of these products, which is very beneficial to us in expanding our user base.
Overall, I'm very excited about Apple's prospects in the Indian market.