Understanding Apple's Conference Call in One Article: Cook Responds to "Chinese Market, Apple Intelligence, DeepSeek, and Mobile Design Innovation"

On January 30th, Eastern Time, after the US stock market closed, Apple announced its fourth-quarter results for the fiscal year ending December 28, 2024, and held an analyst conference call. Key points from the call are as follows: This quarter's revenue was $124.3 billion, a year-on-year increase of 4%, setting a new historical high; earnings per share were $2.40, a year-on-year increase of 10%, also a historical high. Revenue records were set in the Americas, Europe, Japan, and other Asia-Pacific regions. Service business revenue reached a historical high, with nearly $100 billion in revenue over the past year, a year-on-year increase of 14%. The gross margin for the service business reached 75%, significantly contributing to the company's overall gross margin. Revenue in Greater China decreased by 11% year-on-year, with more than half of the decline attributed to reduced channel inventory. Additionally, Apple Intelligence has not yet launched in the Chinese market, which has had some impact on sales. A fiscal stimulus or subsidy policy was just announced in January, which did not affect the December quarter. In markets where Apple Intelligence has been launched, our sales performance has significantly outperformed markets where it has not been launched. Users frequently utilize features such as writing tools, image playgrounds, and Genmoji, with new language versions set to launch in April to further expand the user base. Apple Intelligence is expected to become mainstream, and once users start using related features, they will find it difficult to revert to a state without them. Regarding DeepSeek, Apple stated that innovations that drive efficiency improvements are a good thing. The company's close integration of chips and software will continue to serve Apple well. Apple operates on both the device side and private cloud, which architecturally resembles the operation on the device side. From a capital expenditure perspective, Apple has always taken a cautious and meticulous approach to investment and continues to leverage a hybrid model, which remains beneficial to Apple. Emerging markets are performing strongly, especially in India, where the iPhone has become the best-selling model. India is the second-largest smartphone market and the third-largest personal computer and tablet market globally. Apple continues to expand in the Indian market, adding four new stores and utilizing the market for local production and exports. The installed base of devices in emerging markets has achieved double-digit growth, which is expected to partially offset the challenges in the Chinese market in the future. The company's product and service innovation is key to driving growth. Apple believes there is still significant room for innovation in design, and I am very optimistic about our product planning. I believe there is still much innovation potential in smartphones. Mac sales increased by 16% year-on-year, and iPad sales grew by 15%, mainly due to the performance of new products with the M4 chip and the continued success of the MacBook Air. Mac products have a leading advantage in AI workload areas and still have innovation potential in the future. The company's overall gross margin guidance is between 46.5% and 47.5%, mainly benefiting from increased sales of high-margin products (such as Pro series products) and an improved cost environment for goods Foreign exchange rates (FX) will put some pressure on gross margins in the coming quarters, but this has been incorporated into the guidance range. Changes in the product mix (such as AI hardware products) will continue to drive growth in product gross margins. The following is a transcript of the conference call, translated by AI: Conference Host: Hello everyone, welcome to the FinWise Bancorp Q4 2024 earnings call. Today's meeting is hosted by the following members of the management team: CEO Kent Landwatter, President Jim Noon, and CFO Bob Wallman. Kent Landwatter, CEO of FinWise Bancorp: Good afternoon everyone. Our strong performance in the fourth quarter wraps up another successful year for FinWise. This year, we made significant progress in expanding and diversifying our revenue sources and enhancing the company's long-term growth capabilities. Leveraging the strengths of our core business, combined with strategic initiatives, we delivered solid financial performance, including a rebound in loan origination for existing projects, stable revenues, and continued growth in tangible book value per share. Additionally, at the banking level, we are well-capitalized, far exceeding federal regulatory standards. In 2024, we are also pleased to announce several new strategic projects, which are highlights of our development. Specifically, we added four new loan projects, including two credit enhancement product projects, one payment project, and one credit card project. We continue to see good momentum in our new project pipeline, especially given the strong enthusiasm from our strategic partners regarding the benefits of our extensive banking and payment platforms. From a regulatory perspective, we are in a favorable position to guide fintech companies through rigorous compliance processes, which provides us with significant opportunities to further expand our market share. As part of our corporate culture, we have actively invested in compliance and risk management infrastructure over the years and have successfully navigated multiple rounds of regulatory examinations. As of the end of 2024, approximately 38% of the company's employees are engaged in compliance, risk management, BSE (Banking Services and Expansion), and IT functions. Looking ahead, we are very optimistic about our business prospects. Currently, we expect steady growth in 2025. In particular, we anticipate that credit enhancement solutions will become a significant growth contributor in 2025. Meanwhile, our BIN (Bank Identification Number) sponsorship and payment projects have officially launched and are expected to gradually gain market recognition. Furthermore, we expect loan origination for existing projects to remain stable, and the new projects signed at the end of last year will gradually expand and contribute incremental growth in the coming quarters. Notably, the BIN sponsorship and payment projects offer medium- to long-term growth opportunities, while our credit enhancement products represent more direct and short-term growth opportunities. By integrating these products and services on the same platform, we are now able to meet the majority of business scenario needs. This also provides us with a more sticky and sustainable source of revenue, which grows slowly in the initial stages but will accelerate as project scale expands. Finally, we remain highly focused on achieving positive operational leverage. Our incremental investments in new projects have been largely completed, and future expense growth will primarily be linked to production activities. Next, I will hand over the time to our President, Jim Noon. Jim Noon, President of FinWise Bancorp: We are pleased to have issued $1.3 billion in loans in the fourth quarter, bringing our total loan issuance for fiscal year 2024 to $5 billion, a 16% increase compared to $4.3 billion in the previous fiscal year. The loan issuance in the fourth quarter included a seasonal slowdown from the private student loan program and did not include substantial contributions from the new loan projects announced at the end of 2024. As we mentioned earlier, there is typically a delay of several quarters from project announcement to seeing loan issuance from new partners. Although we are still in the early part of the first quarter, our loan issuance remains at $1.3 billion on a quarterly basis for the first three weeks ending January 2025. As Kent previously mentioned, we expect loan issuance from existing projects to remain stable, and new projects will gradually expand over the next few quarters. Our SBA (Small Business Administration) 7(a) loan issuance increased again in the fourth quarter compared to the third quarter. With a slight decrease in interest rates, the number of qualified applicants has gradually increased, driving up the volume of SBA loan applications. We remain cautiously optimistic about the rebound in SBA loans. Additionally, we have also achieved solid growth in equipment leasing and owner-occupied commercial real estate loans, which continue to provide the bank with stable interest income and good credit quality. On a quarter-over-quarter basis, the balance of SBA guaranteed loans grew by 1.5%. This quarter, we began selling part of the guaranteed portion of SBA loans, which has driven an increase in loan sale revenues. As we have mentioned in the past, as long as market conditions allow, SBA loan sales will always be a core business activity for us. The market conditions in the fourth quarter were favorable, and we expect this trend to continue in the short term. Our overall balance sheet strategy has remained consistent this quarter, including strategic loans and SBA loans. In terms of strategic project loans, we typically complete the sale of loans within a few days, and the loans we hold are primarily cash-backed. For SBA loans, the loans we issue include a government-guaranteed portion, which can be retained or sold in the secondary market. Retaining the guaranteed portion can provide us with interest income without credit risk. At the end of the fourth quarter, our balance of SBA guaranteed loans and strategic project loans (sellable portion) accounted for 45% of the total loan portfolio, and both types of loans have low credit risk Regarding credit quality, the loan loss reserves for this quarter were $3.9 million, up from $2.2 million in the third quarter. The increase was primarily due to a net write-off of $1 million in the unsecured portion of SBA loans, bringing the total net write-offs for the fourth quarter to $3.2 million, compared to $2.4 million in the previous quarter. As we mentioned earlier, our strict collateral policies typically help mitigate net write-off risks. The balance of non-performing loans this quarter was $36.4 million, up from $30.6 million in the previous quarter. Although it increased by $5.8 million, it was below the $10 million increase we anticipated in our last conference call. This was mainly due to the progress made by our portfolio management team in collecting on certain overdue accounts. Bob Wallman, CFO of FinWise Bancorp: Thank you, Jim. Good afternoon, everyone. I will briefly review our performance in the fourth quarter and several key financial metrics, providing explanations where necessary. In the fourth quarter, we achieved a net profit of $2.8 million, or $0.20 diluted earnings per share, bringing the full-year diluted earnings per share for 2024 to $0.93. I would like to specifically mention an item related to the fourth quarter: this quarter we incurred a loss of $895,000 due to the redemption of approximately $160 million in high-yield callable certificates of deposit (Callable CDs) and replacing them with other lower-cost wholesale financing. The unamortized premium expense generated by this redemption reduced our other miscellaneous income by $895,000. We consider this item as a reduction in non-core income. The average loan balance for this quarter (including loans held for sale and loans held for investment) was $522 million, up from $493 million in the previous quarter. The growth was primarily driven by the SBA 7(a) commercial leasing and consumer loan programs. Average interest-bearing deposits were $355 million, up from $341.2 million in the previous quarter. The quarter-over-quarter growth was mainly driven by increases in interest-bearing checking accounts, money market accounts, and brokered time deposits. Next is the income situation. This quarter, net interest income was $15.5 million, up from $14.8 million in the previous quarter, with the increase attributed to the rise in loans held for sale and a decrease in funding costs from replacing $160 million in callable CDs with lower-cost certificates of deposit, partially offset by an increase in interest-bearing deposits needed to support asset growth. The net interest margin (NIM) for this quarter was 10.0%, up from 9.70% in the previous quarter. We expect the net interest margin to gradually narrow in the future as we actively reduce credit risk in our portfolio. Notably, our SBA portfolio is typically tied to the Prime Rate and is adjusted at the beginning of each quarter, so changes in the Prime Rate may affect our net interest margin. Non-interest income for this quarter was $5.6 million, down from $6.1 million in the previous quarter. The quarter-over-quarter decline was primarily due to the $895,000 loss from the redemption of callable CDs mentioned earlier, which was partially offset by an increase in SBA loan servicing fees and gains from the sale of guaranteed portion loans Encouragingly, despite a seasonal slowdown in the student loan program this quarter, strategic project expenses remained relatively stable quarter-over-quarter, highlighting the effectiveness of our efforts in diversifying strategic projects. Next, let's discuss operating expenses. We are pleased to see that the pace of growth in operating expenses continues to slow, which is also a goal we mentioned in previous conference calls. Non-interest expenses in the fourth quarter decreased to $13.6 million, down from $14 million in the previous quarter. The main reason for the quarter-over-quarter decline was due to the reassessment of performance bonuses, with some bonus accruals being partially reversed. Our efficiency ratio improved from 67.5% in the previous quarter to 64.2% this quarter. Looking ahead, we will continue to focus on achieving positive operating leverage and expect that the growth in expenses related to new employees will be more closely tied to production activities. That said, due to the large-scale infrastructure construction over the past 18 months, we expect the efficiency ratio to remain at a high level before new projects begin to generate revenue. Regarding tax issues, the effective tax rate for the fourth quarter was 24.3%, down from 25.1% in the previous quarter. We expect the effective tax rate for 2025 to be between 25.0% and 25.5%. Finally, I would like to mention one item: this quarter, we added balance sheet and income statement account information related to credit-enhanced loans at the end of our financial report and investor presentation, along with some non-GAAP disclosures. These additional accounts and disclosures are intended to demonstrate the impact of credit-enhanced products on the financial statements and various financial metrics. While these amounts currently do not have a significant impact, as this product gradually develops in the future, these disclosures will help better understand FinWise's financial performance. The following is the Q&A session: Eric Woodring, Morgan Stanley Analyst: Tim, you mentioned in your remarks that the sales performance of the iPhone 16 model is better in markets where "Apple Intelligence" has been launched. Could you elaborate on this aspect and share some details to help us better understand how "Apple Intelligence" is affecting iPhone demand, and what features users are currently using the most? Additionally, I have a brief follow-up question. Tim Cook, CEO of Apple: Hello, I'm Tim. We have indeed observed that in markets where we launched "Apple Intelligence," the sales of the iPhone 16 series have outperformed markets where this feature has not yet been introduced. As for the features users are utilizing, they are using all the features I mentioned at the beginning, including writing tools, Image Playground, Genmoji, and visual intelligence. Moreover, we found that these features are being widely used Another popular feature is the "Cleanup" tool. People really liked this feature when they saw it demonstrated in-store. In the second release of version 18.2 for the December quarter, we only had about 2 to 2.5 weeks, and it was launched only in the UK and other English-speaking countries at that time. Therefore, we have only received some early market feedback, but overall it has been quite good. Eric Woodring, Morgan Stanley Analyst: Thank you for the information, Tim, it's very helpful. Next, I want to talk about the Chinese market. The Chinese market has been frequently in the news lately. Can you discuss the other challenges Apple faces in China? Do these challenges include an increased preference for local brands among consumers, thereby weakening demand for Western tech brands? Or is it because the iPhone 16 does not feature Apple Intelligence, affecting the upgrade cycle? Can you elaborate on your views on the Chinese market and what you've learned from market feedback? Thank you. Tim Cook, CEO of Apple: Sure, of course. If you look at our revenue in Greater China this quarter, it declined by 11% year-over-year. More than half of the decline was due to changes in channel inventory from the beginning to the end of the quarter. Additionally, we have not launched the Apple Intelligence feature in the Chinese market yet. As we discussed earlier, in markets where we have launched Apple Intelligence, our sales performance has significantly outperformed those where it has not been launched. Of course, China is one of the most competitive markets globally, so all these factors are valid. Regarding the macroeconomic environment, a fiscal stimulus or subsidy policy was just announced in January, which did not impact the December quarter. In the December quarter, some provincial governments did provide subsidies, but the national plan was announced around January 20. This plan covers categories that include our products, such as smartphones, tablets, PCs, and smartwatches, and sets a maximum price limit. We are indeed seeing the fiscal stimulus policy being implemented and look forward to discussing its specific impacts in the next conference call. Ben Ryses, Melius Analyst: Hi everyone, thank you for the opportunity to ask a question. Hi Tim, I want to ask a question you might have anticipated. Some believe that Apple is the main beneficiary of declining costs. I would like to hear your thoughts on this, especially in the context of the recent DeepSeek (open-source model) incident. Do you have any new insights on the impact of declining costs on margins and the company's execution capabilities? This trend may happen regardless, but I want to understand its impact on Apple. Tim Cook, CEO of Apple: Okay, overall, I believe that innovations driving efficiency improvements are a good thing, and this is also reflected in the model (referring to DeepSeek) you see. Our close integration of chips and software will continue to serve us well. As you know, we operate on both the device side and in private clouds, which architecturally resembles the operation on the device side. From a capital expenditure (CapEx) perspective, we have always taken a cautious and thorough approach to investment and continue to leverage a hybrid model, which has been beneficial to us so far. Ben Ryses, Melius Analyst: Great, thank you, Tim. Next, I would like to ask about the development trajectory of the iPhone. You obviously won't talk about new products, but do you think there is still a lot of room for innovation in terms of design in the future? Or do you feel that the current product line has already shown the direction for future development? I want to ask directly, do you think there are more possibilities for innovation in smartphones? Can you foresee some changes in the market in the next two to three years? Thank you. Tim Cook, CEO of Apple: Ben, I believe there is still a lot of room for innovation, and I am very optimistic about our product planning. I believe smartphones still have a lot of innovative potential. Michael Ng, Goldman Sachs Analyst: Good afternoon, thank you for the opportunity. I also have two questions. First, it's great to hear that iPhone upgrade users have set a new record; I think this is the first time you’ve mentioned this in over a year. Can you talk about what has driven this strong upgrade demand? In the market where you have launched Apple Intelligence, has this feature helped with upgrades? Thank you. Tim Cook, CEO of Apple: Okay, thank you for your question. As for the iPhone, our upgrade users have indeed reached an all-time high, with the number of upgrade users never being this high before. At the same time, the iPhone's installed base has also reached a historical peak. If you compare the performance of the iPhone 16 and iPhone 15, both products were released in September, thus covering two quarters from September to the end of December. During this period, the performance of the iPhone 16 outperformed that of the iPhone 15. Therefore, I think you can conclude that users indeed have compelling reasons to upgrade. Additionally, in the market where we launched Apple Intelligence, the performance of the iPhone 16 outperformed markets where this feature has not yet been launched. The performance in this regard is quite impressive. Michael Ng, Goldman Sachs Analyst: Thank you very much, Tim, for the clear answer. I have one more question about the iPad Pro, especially regarding the thinner version of the product. Can you talk about how this thin design has impacted the overall sales of the iPad? Have your market and consumer research shown any value assessments from consumers regarding this design? Thank you. Tim Cook, CEO of Apple: That's a good question. Overall, iPad sales grew by 15% this quarter, with the growth being driven more by the iPad Air and entry-level iPad rather than the high-end iPad Pro. But overall, we are very pleased with the 15% growth in the iPad category, which is an impressive achievement. Perhaps most notably, in the December quarter, over half of iPad sales came from first-time iPad buyers. This indicates that we are doing well in attracting new users. Ben Ryses, Melius Analyst: Good afternoon, everyone. I have two questions as well. First, your Apple product sales in emerging markets currently show a very strong growth trend. Can you talk about your views on the sustainability of this growth in these markets from a macro perspective? Secondly, do you think the total volume in these emerging markets is now large enough to offset the headwinds faced in the Chinese market? Or is the growth rate in these markets fast enough to potentially offset the challenges in China in the future? Tim Cook, CEO of Apple: We have performed exceptionally well in many emerging markets. As you have learned from previous conference calls, I am particularly optimistic about the Indian market. India set a sales record in the December quarter, and we are also opening more stores there. We have announced the addition of four new stores in India. This quarter, the iPhone was the best-selling model in the Indian market. Additionally, India is the second-largest smartphone market in the world and the third-largest PC and tablet market. Therefore, there is huge market potential here, and our share in these markets is still quite small, so I believe there is a lot of room for growth in the future. This is just one example among many emerging markets. Kevin Perek, CFO of Apple: Tim, let me add to that, Amit. In emerging markets, our installed base of devices, including both total and iPhone installations, has achieved double-digit growth, which is also an encouraging sign. Ben Ryses, Melius Analyst: Great. Next, I would like to ask about the gross margin for the March quarter. You mentioned in your guidance that the gross margin is expected to be roughly flat quarter-over-quarter, whereas typically, the gross margin would increase by about 50 basis points. Can you discuss the factors affecting your gross margin? Kevin, can you specifically talk about whether foreign exchange (FX) has had a significant impact on the gross margin? Kevin Perek, CFO of Apple: Sure, Amit, I’ll take that question. As I mentioned in my remarks, we expect our gross margin to be between 46.5% and 47.5%. We are very pleased with this level of expectation. As you mentioned, there are always some factors at play that can affect it up or down Kevin Perek, Chief Financial Officer of Apple Inc.: We do believe that foreign exchange (FX) will have some adverse effects, which will not only impact revenue growth but also have a quarter-over-quarter effect on gross margin. However, we believe that this impact will be offset by favorable cost conditions and the product mix of our services business. Additionally, as you understand, from the first quarter to the second quarter, particularly in terms of product business, we will lose some economies of scale in the second quarter due to the very large scale of product sales in the first quarter. Therefore, there are indeed some factors that increase and decrease. However, we are satisfied with the expected range, which is a very strong gross margin guidance. Wamsi Mohan, Analyst at Bank of America: Thank you, Tim. I would like to follow up on the channel inventory issue you just mentioned in the Chinese market. Could you talk more broadly about your channel inventory situation across different product lines and regions? Do you think inventory levels in other regions have increased or exceeded normal ranges? Given the inventory clearance that occurred in China this quarter, do you think that the progress in the Chinese market will trend more towards normal after entering the March quarter? Additionally, I have a follow-up question. Tim Cook, Chief Executive Officer of Apple Inc.: Okay, I don’t want to predict regional sales for the current quarter. But from a global perspective, we are very satisfied with the total channel inventory of iPhone. In terms of the Chinese market, I mean, our channel inventory has decreased from the beginning of the quarter to the end of the quarter, which accounted for more than half of the reported performance decline. Part of the reason is that our sales at the end of this quarter were somewhat better than expected. Therefore, our inventory levels are lower than we anticipated. Wamsi Mohan, Analyst at Bank of America: As a follow-up question, your services business has seen very strong growth, but I know you are facing some quite severe regulatory pressures globally. So how should investors view the impact of these regulatory pressures on revenue or margins? Is there a possibility that these impacts could ease as the regulatory environment becomes more balanced? Thank you. Kevin Perek, Chief Financial Officer of Apple Inc.: Yes, I would like to reiterate that our services business set a record high in the December quarter, growing 14% year-over-year. This growth has been strong across all geographic regions and service categories. As you know, our services portfolio is very broad, so the overall momentum is good. Additionally, we have seen a continued increase in customer engagement across all service products, including transaction accounts and paid accounts. We have reached an all-time high, with over 1 billion paid subscribers on our services platform. Samik Chatterjee, Analyst at JP Morgan: Hello, thank you for answering my questions. First, both Mac and iPad performed very well this quarter. I would like to ask about your views on the sustainability of double-digit growth for these two product lines. We just discussed the impact of Apple Intelligence on iPhone sales, but how do you think this type of technology affects Mac sales? Currently, there is a lot of discussion about the PC market. Can you share your views on this? Thank you. Tim Cook, CEO of Apple: Sure. Mac sales grew by 16%, and iPad sales grew by 15%. The growth of Mac is mainly due to the strong performance of our new products launched this quarter, as well as the continued success of the MacBook Air. As you know, we launched the MacBook Pro, iMac, and Mac Mini based on the M4 chip this quarter. We believe we have the best AI PC on the market for running AI workloads. The chips for Mac have been designed by us and optimized for these workloads for several years. Therefore, while I don't want to predict the performance of future product categories, we are very satisfied with the performance of Mac and iPad this quarter. Samik Chatterjee, JP Morgan Analyst: Okay, Tim, I want to borrow your earlier mention of India as a strong emerging market to ask about your supply chain planning. How much of your supply chain planning in India is based on growth expectations for that market, and how much is for supply chain diversification? How should we view your strategic layout in this country? Tim Cook, CEO of Apple: Yes. If you look at our manufacturing operations in India, we produce products for both the local market and for export. Our business needs to achieve a certain scale of economy for production to make sense in a country. This means we see India as both a supply center for the local market and as an export market. David Vogt, UBS Analyst: Okay, thank you for answering my question. Tim, this question is for you. I want to understand the role of Apple Intelligence in driving iPhone business growth that you mentioned earlier. However, when I review the channel inventory situation over the past few years and try to adjust the relevant data, it seems that your iPhone revenue in the March quarter may be comparable to the performance two years ago and the same period last year. Can you talk about this aspect? David Vogt, UBS Analyst: So, how do we explain the relationship between the growth momentum of the iPhone business and the relatively stable performance over the past few years? Secondly, I want to talk about the gross margin issue. Clearly, you have done an excellent job in improving gross margins. In terms of the services business, how much more room do you think there is for gross margin improvement in the future? A 75% service gross margin is already quite a successful achievement, and I would like to understand your expectations for mid-term gross margins. Thank you. Tim Cook, CEO of Apple: Yes. Regarding Apple Intelligence, what I meant earlier is that markets that launched this feature during the first quarter saw year-over-year performance of their iPhone business outperform markets that did not launch this feature This gives us a positive signal, which is also why we feel satisfied. Additionally, as I mentioned earlier, the performance of the iPhone 16 series has outperformed the 15 series from its release until the end of the December quarter (starting from September). Therefore, I believe both data points are very valuable. We will launch the next round of language versions in April (the third quarter). I will ask Kevin to address the question regarding gross margin. Kevin Perek, Chief Financial Officer of Apple: Okay, David, hello. Regarding the gross margin of the services business, first, we need to review that the services business overall has a positive contribution to the company's total gross margin. It is worth noting that our services business portfolio is very broad, and the gross margins of different services vary greatly. This is partly due to the different nature of the businesses and partly due to our different accounting methods. Therefore, an important influencing factor on the gross margin of the services business is the relative performance of different service businesses within the portfolio. In addition, we have some scaled businesses, such as payment services and iCloud, which positively impact gross margin as the number of users increases. In the December quarter, we saw good growth momentum across the entire services business, resulting in a services gross margin of 75%. Our overall company gross margin guidance is between 46.5% and 47.5%, which we believe is quite strong. Krish Sankar, TD Cowen Analyst: Hello, thank you for answering my question. I have two questions as well. The first question is for Tim. You achieved a 16% year-over-year growth in the Mac product line last quarter. I would like to know how much of this was driven by innovation in Mac products and how much was driven by the upgrade cycle? Tim Cook, Chief Executive Officer of Apple: Regarding your question, I can't give a precise answer, but I believe it is a combination effect. These products themselves are very attractive, especially those based on the M4 chip, which have driven double-digit growth in upgrade users while also driving double-digit growth in conversion users (users switching from other brands). Therefore, we have seen positive performance in both areas, thanks to these compelling products. Krish Sankar, TD Cowen Analyst: Understood, thank you, Tim. Next, I have a follow-up question about gross margin, directed at Kevin, mainly concerning the product business. Last quarter, your product gross margin reached 39.3%, which is similar to the same period last year. This is already a very strong performance. I would like to know how much room you think there is for improvement in product gross margin? Or do you believe that with the launch of more AI-related hardware products, there will be further growth potential in product gross margin? Kevin Perek, Chief Financial Officer of Apple: Thank you for your question, Krish. In terms of product gross margin, as you mentioned, we achieved a quarter-over-quarter increase of 300 basis points in the December quarter, primarily due to favorable product mix and economies of scale. As you know, the first quarter is typically when we launch many new products, so we tend to benefit from higher sales volumes that provide economies of scale. Overall, product gross margin is influenced by various factors. One key factor is the release of different products, which have different gross margin structures, so changes in the product mix can have an impact. For example, in the smartphone segment, we are seeing more and more customers opting for our Pro series products. This trend is partly driven by "affordability" factors, enabling customers to purchase our premium products, which typically have higher gross margins. Therefore, this trend had a positive impact on our performance in the December quarter. Additionally, from a cost perspective, we are currently in a favorable commodity price environment, which also benefited the gross margin in the December quarter. However, as we discussed earlier, entering the March quarter, foreign exchange rates will bring some pressure, but we have already accounted for this in our gross margin guidance of 46.5% to 47.5%. Richard Kramer, Arete Research Analyst: Thank you very much. My first question is for Tim, regarding the acceleration of Apple Intelligence adoption. Do you think it's just a matter of time, such as expanding market and language support, or increasing the install base of devices that support Apple Intelligence? Or does it also involve funding issues, such as increasing investment in R&D or marketing? Based on Apple's past experience in the services business, do you think this technology will reach a "tipping point" to become mainstream? Tim Cook, CEO of Apple: I truly believe that Apple Intelligence will become mainstream. I have received a lot of feedback from users about different features. It's important to note that on our iPhone product line, only the iPhone 15 Pro or iPhone 16 can use Apple Intelligence. Therefore, as this user base grows, the usage rate will continue to rise. From personal experience, I also know that once you start using these features, it's hard to imagine life without them. Tim Cook, CEO of Apple: I receive hundreds of emails every day, so the summary feature becomes very important. So, I think it's a combination of various factors. Of course, we will also launch a series of new language versions in April, further expanding the user base. Richard Kramer, Arete Research Analyst: Okay, thank you, Tim. Next, Kevin, I want to ask a question about pricing strategy. One of Luca's (former CFO) significant contributions was achieving record profit margins for Apple while maintaining a relatively consistent pricing strategy across the product line. Your current profit levels are very stable; can you talk about user sensitivity to price? Do you think offering a broader range of price options within the product range could further enhance market share or drive product growth? Kevin Perek, CFO of Apple: That's a good question. I think we won't deviate from our existing strategy, as it has been working well for us. We always weigh short-term and long-term considerations. I believe we have a fairly disciplined pricing strategy that works well for us, and I think we will continue to adhere to this strategy in the future. Batya Malik, Citigroup Analyst: Hello, thank you for answering my question. How do you view the potential impact of tariff policies on consumer demand? During the "Trump 1.0" era, you managed quite well, and now with the potential impacts of "Trump 2.0" policies, what are your thoughts? Tim Cook, CEO of Apple: We are monitoring the situation and currently have no more information to share. Batya Malik, Citigroup Analyst: Okay, Tim, as a follow-up question, there has been a lot of discussion in the market about Gentek AI and agents. Do you expect the upgraded Siri to be a "killer app" in the Apple Intelligence feature suite when it launches in April? Tim Cook, CEO of Apple: I think "killer features" vary from person to person. But for most people, they might use multiple features daily, and Siri is certainly one of them. The upgrade for Siri will be rolled out in the coming months. Ben Bollin, Cleveland Research Company Analyst: Good evening, everyone, thank you for answering my question. Tim, I would like to hear your thoughts on the actual lifespan of these devices. In particular, your device sales performance in fiscal year 2021 was very strong; does this create an opportunity for accelerated upgrades in the future? Tim Cook, CEO of Apple: Ben, it depends on different types of users. We have "early adopters" who are very willing to upgrade to the latest technology quickly and have a high upgrade frequency. There are also some users who are in the completely opposite situation, with long upgrade cycles, while most users fall somewhere in between. I do believe that we sold a large number of devices during the pandemic, which created a significant opportunity for the company, not limited to upgrade demand for a single product category