Earnings Call Transcript
Apple Inc. (AAPL)
Earnings Call Transcript - AAPL Q1 2023
Operator, Operator
Good day, everyone, and welcome to the Apple Q1 Fiscal Year 2023 Earnings Conference Call. Today's call is being recorded. And now at this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead.
Tejas Gala, Director of Investor Relations and Corporate Finance
Thank you. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Before turning the call over to Tim, I would like to remind everyone that the December quarter spanned 14 weeks, while the March quarter, as usual, has 13 weeks. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks.
Timothy Cook, CEO
Thank you, Tejas. Good afternoon, everyone, and thanks for joining us. Today, we're reporting revenue of $117.2 billion for the December quarter. We set all-time revenue records in a number of markets, including Canada, Indonesia, Mexico, Spain, Turkey and Vietnam, along with quarterly records in Brazil and India. As a result of a challenging environment, our revenue was down 5% year-over-year. But I'm proud of the way we have navigated circumstances, seen and unforeseen, over the past several years, and I remain incredibly confident in our team and our mission and in the work we do every day. Let me discuss the 3 factors that impacted our revenue performance during the quarter. The first was foreign exchange headwinds, which had a nearly 800 basis point impact. On a constant currency basis, we grew year-over-year and would have grown in the vast majority of the markets we track. The second factor, which we described in a November 6 update, was COVID-19-related challenges, which significantly impacted the supply of iPhone 14 Pro and iPhone 14 Pro Max and lasted through most of December. Because of these constraints, we had significantly less iPhone 14 Pro and iPhone 14 Pro Max supply than we planned, causing ship times to extend far beyond what we had anticipated. As we always have every step of the way throughout the pandemic, we continued to prioritize people and worked with our suppliers to ensure the health and safety of every worker. Production is now back where we want it to be. The third factor was a challenging macroeconomic environment as the world continues to face unprecedented circumstances, from inflation to war in Eastern Europe to the enduring impacts of the pandemic. And we know that Apple is not immune to it. But whatever conditions we face, our approach is always the same. We are thoughtful and deliberate. We manage for the long term. We adapt quickly to circumstances outside our control while delivering with excellence in the things we can. We invest in innovation, in people and in the positive difference we can make in the world. And we do it all to provide our customers with technology that will enrich their lives and help unlock their full creative potential. It's a wonderful thing to be a part of, and it's so rewarding for all of us at Apple when we hear how much our customers are loving what we create. Let me talk now about what we saw across our product categories. Starting with iPhone. Revenue came in at $65.8 billion for the quarter, down 8% year-over-year. However, on a constant currency basis, iPhone revenue was roughly flat. Our customers continue to rave about the astounding camera capabilities and unprecedented battery life and the groundbreaking suite of health and safety features. The iPhone 14 lineup pushes the limits of what users can do with a smartphone. During the quarter, Mac revenue came in at $7.7 billion, which was in line with what we had expected. We had a difficult compare because this time last year, we had the extremely successful launch of the redesigned M1 MacBook Pros. We also faced a challenging macroeconomic environment and foreign exchange headwinds. We remain confident in and focused on the long-term opportunity for Mac. Just last month, we introduced new MacBook Pro models powered by our latest developments in Apple silicon, M2 Pro and M2 Max. These chips enable unprecedented performance and do so with less energy, which is not only good for the environment but gives the newest MacBook Pro the longest battery life ever in a Mac. We also introduced the M2-powered Mac mini, which will supercharge productivity for users of all kinds and leave them stunned by just how powerful a Mac mini can be. During the quarter, iPad revenue grew 30% to a total of $9.4 billion. The very strong growth was due in part to a favorable compare to the December quarter a year ago when we experienced significant supply constraints. Customers continue to praise our new lineup for its versatility, whether it's the new iPad Pro now powered by the M2 or the newly designed iPad 10th Generation with its stunning liquid retina display and beautiful colors. Revenue for Wearables, Home and Accessories was $13.5 billion, which was down 8% year-over-year driven by foreign exchange headwinds and a challenging macroeconomic environment. We remain excited about the long-term opportunity in the category. As an example, a few weeks ago, we announced the next-generation HomePod, which is an indispensable addition to the smart home. This powerful smart speaker relies on advanced computational audio to produce an incredible listening experience. We're also helping users make their homes safer with sound recognition. This feature, arriving later this spring, allows HomePod to send a notification directly to a user's iPhone if a smoke or carbon monoxide alarm sound is identified. We continue to hear wide praise for Apple Watch Series 8 and Apple Watch Ultra, which has set a new standard for what's possible with a wearable. From a whole host of health and safety features to incredible new capabilities for extreme athletes, there is something for everyone in these amazing products. Customers are excited about some phenomenal new features we've made available across many of our products as well. One of the highlights is emergency SOS via satellite, which launched for iPhone 14 customers in the U.S. and Canada in November and for customers in France, Germany, Ireland and the U.K. in December. This is a feature we hope our users will never need, but it is incredibly heartening to get emails from people describing the life-saving impact our new safety features have had on them. We're always looking for new ways to empower people to create and collaborate. In December, we released Freeform, a brand-new app that lets users take their ideas wherever they want, anywhere they are, all while collaborating in real time. Freeform has already received praise from reviewers for its flexibility and simplicity as it works seamlessly across iPhone, iPad and Mac. Today, we are very excited to announce that we've achieved a truly incredible milestone. Thanks to our deep commitment to innovation, incredible customer loyalty and satisfaction and a large number of switchers, we now have more than 2 billion active devices as part of our growing installed base, double what it was just 7 years ago. This is an incredible testament to our products and services and the strength of our ecosystem. We set an all-time revenue record of $20.8 billion in services, which was better than what we had expected. We achieved double-digit revenue growth from App Store subscriptions and set all-time revenue records across a number of categories, including cloud and payment services. All told, Apple now has more than 935 million paid subscriptions. Apple has also just begun a historic 10-year partnership with Major League Soccer. Just yesterday, we launched MLS Season Pass, which will give fans in more than 100 countries access to every live MLS regular season game as well as the playoffs and MLS Cup, all with no blackouts. And while we're providing more content to sports fans than ever before, Apple TV+ continues to showcase powerful characters and moving storytelling. We were thrilled to celebrate the holidays alongside our Apple TV+ subscribers with the hit movie Spirited. And we're delighted to see how much people are enjoying new and returning series like Shrinking, Slow Horses and Truth Be Told. And we have some great upcoming movies in Sharper and Tetris, along with Emmy Award winner Ted Lasso returning this spring. During the quarter, we made some great updates to Fitness+ as well, expanding our catalog of more than 3,500 workouts and meditations to include a new kickboxing category and a new sleep theme for meditations. Our latest artist spotlight series features the music of the incomparable Beyonce, and we're excited to take a stroll with guests appearing on our fifth season of Time to Walk. And we continue to build on our decades-long commitment to helping small businesses thrive when we announced Apple Business Connect. This new tool gives business owners even more control over how billions of people see and engage with their products and services every day. Businesses of all sizes can now customize key information for users across Apple Maps, Messages, Wallet, Siri and other apps. Meanwhile, in retail, we celebrated 25 years of the Apple online store and also opened Apple Pacific Centre in Vancouver and Apple American Dream in New Jersey. And I'm grateful to all the teams who helped our customers throughout the busy holiday season. At Apple, we spend a lot of time focused on creating an unparalleled experience for our customers and every product and service that we offer. We're also just as dedicated to leading with our values in everything we do. As part of that work, we strengthened our deep commitment to privacy and security, giving users 3 new tools to protect their most sensitive data: iMessage contact key verification, security keys for Apple ID and advanced data protection for iCloud. At Apple, we feel a deep sense of responsibility to leave the world better than we found it. We're also a year closer to 2030, and we are ever focused on the environmental commitments we set out for the end of the decade. As an example, the latest Mac mini and MacBook Pro models all use 100% recycled aluminum in the enclosure and recycled rare earth elements in all magnets. And in a first for HomePod, we're using 100% recycled gold in the plating of multiple printed circuit boards. In honor of Black History Month, we released the Black Unity collection, including the Special Edition Apple Watch Black Unity Sport Loop, a new matching watch face and iPhone wallpaper. Through our racial equity and justice initiative, we're expanding our support of 5 organizations focused on lifting up communities of color through technology. And we are committed as ever to building on our progress around inclusion and diversity. During the quarter, we also announced that since the inception of our Giving program 11 years ago, we've donated more than $880 million to humanitarian efforts, disaster relief, childhood education and more. And over the last 16 years through our partnership with (RED), Apple-supported grants have helped more than 11 million people get the care and support services they need. As we look ahead in 2023, we are excited about the year to come. At Apple, we are always looking forward, always focused on the next challenge, always determined to do great things with unmatched creativity and unrivaled innovation. And that makes me more confident about the future of Apple than I have ever been. With that, I'll turn it over to Luca.
Luca Maestri, CFO
Thank you, Tim, and good afternoon, everyone. As Tim mentioned, revenue for the December quarter was $117.2 billion, down 5% from last year. A number of factors had a significant impact on our results. First, we faced a very difficult foreign exchange environment, which affected our performance by nearly 800 basis points. In other words, we grew revenue on a constant currency basis. And in fact, we did so in the vast majority of markets. Second, the macroeconomic environment this past quarter was markedly more challenging than 12 months ago. Third, we experienced significant supply shortages for iPhone 14 Pro and iPhone 14 Pro Max in November and through December. On the other hand, we had the positive impact of the 14th week in the quarter that Tejas just mentioned at the beginning of the call. Products revenue was $96.4 billion, down 8% from last year due to the factors I just called out. At the same time, however, our installed base of active devices grew double digits and achieved all-time records in each geographic segment and in each major product category. We're proud to now have over 2 billion active devices in our installed base. This continued growth in the installed base is due to extremely strong levels of customer satisfaction and loyalty and a high number of customers who are new to our products. The installed base growth also helped our services set an all-time revenue record of $20.8 billion, up 6% over a year ago. We achieved this new milestone despite more than 700 basis points of negative impact from foreign exchange. We reached all-time services revenue records in the Americas, Europe and rest of Asia Pacific and a December quarter record in Greater China. We also set records in many Services categories, including all-time revenue records for cloud services, payment services and music and December quarter records for the App Store and AppleCare. Company gross margin was 43%, up 70 basis points from last quarter due to leverage and favorable mix, partially offset by foreign exchange. Products gross margin was 37%, up 240 basis points sequentially. And Services gross margin was 70.8%, up 30 basis points sequentially, both due to the same factors that impacted total company gross margin. Operating expenses of $14.3 billion were significantly below the guidance range we provided at the beginning of the quarter and grew at a slower pace than in the past as we took actions to respond to the current macro environment. Net income was $30 billion. Diluted earnings per share were $1.88, and we generated very strong operating cash flow of $34 billion. Let me now get into more detail for each of our revenue categories. iPhone revenue was $65.8 billion despite significant foreign exchange headwinds, supply constraints on iPhone 14 Pro and iPhone 14 Pro Max and a challenging macroeconomic environment. In spite of these circumstances, we set all-time iPhone revenue records in Canada, Italy and Spain, and saw strong growth in several emerging markets, including all-time iPhone revenue records for India and Vietnam. Importantly, the installed base of active iPhones continues to grow nicely and is at an all-time high across all geographic segments. In emerging markets, in particular, the installed base grew double digits, and we had record levels of switchers in India and in Mexico. Our customers continue to love their experience with our products with the latest survey of U.S. consumers from 451 Research indicating customer satisfaction of 98% for the iPhone 14 family. Mac revenue was $7.7 billion, down 29% year-over-year and in line with our expectations. There were 3 key drivers for our Mac results. First, we had a challenging compare against last year's launch of the completely reimagined MacBook Pros, our first notebooks with M1 Pro and M1 Max. Second, we believe that the macro environment impacted our Mac performance. And third, we faced significant foreign exchange headwinds. At the same time, however, the installed base of active Macs reached an all-time high across all geographic segments, and we continue to see very strong upgraded activity to Apple silicon. Customer satisfaction with Mac remains very strong at 96% based on the latest survey of U.S. consumers from 451 Research. iPad revenue was $9.4 billion, up 30% year-over-year despite significant FX headwinds. This performance was driven by 2 key items. First, during the December quarter a year ago, we experienced significant supply constraints, while this year, we had enough supply to meet demand. Second, we launched our new iPad and the iPad Pro powered by the M2 chip during the quarter. The iPad installed base reached a new all-time high, thanks to incredible customer loyalty and a high number of new customers. In fact, over half of the customers who purchased iPads during the quarter were new to the product. Wearables, Home and Accessories revenue was $13.5 billion, down 8% year-over-year. The year-over-year decline was driven by significant FX headwinds and a challenging macroeconomic environment. However, our installed base of devices in the category set a new all-time record thanks to the largest number of customers new to our smartwatch that we've ever had in a given quarter. In fact, nearly 2/3 of customers purchasing an Apple Watch during the quarter were new to the product. Moving to Services. We generated $20.8 billion in revenue, a new all-time record in total and for many Services offerings in spite of a difficult foreign exchange environment and macroeconomic headwinds impacting certain categories such as digital advertising and mobile gaming. In constant currency, we grew Services revenue double digits on top of growing 24% during the December quarter a year ago. We remain focused on the large long-term opportunity in this category, and we continue to observe several trends that reflect the strength of our ecosystem. For example, we saw increased customer engagement with our Services during the quarter. Both our transacting accounts and paid accounts grew double digits year-over-year, each setting a new all-time record. Paid subscriptions also continued to grow nicely. We now have more than 935 million paid subscriptions across the services on our platform, up more than 150 million during the last 12 months alone and nearly 4x what we had just 5 years ago. And we continue to increase the reach and improve the quality of our offerings. For instance, Apple Pay is now available to millions of merchants in nearly 70 countries and regions. And we saw a record-breaking number of purchases made using Apple Pay globally during the holiday shopping season. Finally, our installed base of over 2 billion active devices represents a great foundation for future expansion of our ecosystem, and it continues to grow even during difficult macroeconomic conditions, which speaks to the exceptionally high levels of customer loyalty and satisfaction and our ability to attract new customers to our platform. The growth is coming from every major product category and geographic segment, with strong double-digit increases in emerging markets such as Brazil, Mexico, India, Indonesia, Thailand and Vietnam. Turning to the enterprise market, we are seeing continued adoption of our Services for business like Apple Business Essentials, AppleCare, Tap to Pay and Apple Financial Services. For example, Mars Incorporated has expanded its use of AppleCare for Enterprise to provide timely device support and assurance for iPads deployed across their manufacturing sites. Meanwhile, HCA Healthcare has leveraged Apple Financial Services to manage the annual refresh of its entire fleet of iPhones. This not only ensures that their staff stay current on the latest Apple technology, but also provides them with significant annual savings in the process. Let me now turn to our capital return program and our cash position. We returned over $25 billion to shareholders during the December quarter as our business continues to generate very strong cash flow. This included $3.8 billion in dividends and equivalents and $19 billion through open market repurchases of 133 million Apple shares. We ended the quarter with $165 billion in cash and marketable securities. We repaid $1.4 billion in maturing debt and decreased commercial paper by $8.2 billion, leaving us with total debt of $111 billion. As a result, net cash was $54 billion at the end of the quarter, and we maintain our goal of becoming net cash-neutral over time. As we move into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance, but we are sharing some directional insights based on the assumption that the macroeconomic outlook and COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. In total, we expect our March quarter year-over-year revenue performance to be similar to the December quarter. This represents an acceleration in our underlying year-over-year business performance as the December quarter benefited from an extra week. Foreign exchange will continue to be a headwind, and we expect a negative year-over-year impact of 5 percentage points. For Services, we expect revenue to grow year-over-year while continuing to face macroeconomic headwinds in areas such as digital advertising and mobile gaming. For iPhone, we expect our March quarter year-over-year revenue performance to accelerate relative to the December quarter year-over-year revenue performance. For Mac and iPad, we expect revenue for both product categories to decline double digits year-over-year because of challenging compares and macroeconomic headwinds. We expect gross margin to be between 43.5% and 44.5%. We expect OpEx to be between $13.7 billion and $13.9 billion. We expect OI&E to be around negative $100 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.23 per share of common stock payable on February 16, 2023, to shareholders of record as of February 13, 2023. With that, let's open the call to questions.
Tejas Gala, Director of Investor Relations and Corporate Finance
Thank you, Luca. Operator, may we have the first question, please.
Operator, Operator
Certainly. We will go ahead and take our first question from David Vogt with UBS.
David Vogt, Analyst
So Tim, and maybe this is for Luca as well. You talked about the supply chain returning back to normal after a very difficult October, November, but we're still seeing some disruptions across tech products, whether it's enterprise or consumer-facing. How do you think about your supply chain and maybe the levels of inventory or builds that you might need as we go forward to sort of insulate your business from these sort of episodic disruptions? Have you changed your view? And if so, how does that affect ultimately margins and sort of your balance sheet and cash flow items going forward?
Timothy Cook, CEO
This is Tim. From a supply perspective, we experienced some disruptions from early November through most of December. Currently, our production is where it needs to be, so that issue has been resolved. Looking ahead, we manufacture our products globally, sourcing components from various countries, with final assembly occurring in three countries for just the iPhone. We will continue to optimize this process over time to enhance it. Over the last three years, we've faced significant challenges, including COVID and silicon shortages. Overall, I believe our supply chain has proven to be quite resilient. Regarding the supply for this quarter, which I think you mentioned, we currently have a good supply of most products.
Operator, Operator
Our next question is from Shannon Cross of Credit Suisse.
Shannon Cross, Analyst
Luca, I wanted to dig a bit more into the commentary on gross margins. The guidance, especially at 43.5% to 44.5%, is obviously quite strong. So I'm wondering what's helping you out there, assume mix and some other things. And then how should we think about what currency and hedge is going to do as we look forward? And then I have a follow-up.
Luca Maestri, CFO
Shannon, yes, I mean, we've had good margin for the December quarter to start with. We reported 43%. Obviously, in December, we have the benefit of leverage because of the seasonality of the business, but we also had favorable mix across the board. Of course, foreign exchange is an issue right now. In the December quarter on a sequential basis, foreign exchange was a negative 110 basis points for us. And on a year-over-year basis, it's 300 basis points. So obviously, the FX environment has changed a lot during the last 12 months. For March, yes, we've seen a margin expansion, 43.5% to 44.5%. We're doing a lot of work around cost, of course. Mix will continue to help, both within categories and services mix as we move away from the holiday season. But we're doing a lot of work on the cost structure, and that is paying off. Foreign exchange is still a negative, about 50 basis points sequentially, but it's mitigating. The last couple of weeks, the dollar has weakened a bit. And so hopefully, as we go through the year, hopefully, things will improve. But for now, as you correctly state, we are in a good position on margins.
Shannon Cross, Analyst
Tim, can you share some insights about China? Specifically, I'm curious about the demand side. Following the Chinese New Year and the reopening, are you noticing a return of the Chinese consumer? What products are they purchasing, and how do you view your position in that market?
Timothy Cook, CEO
Last quarter, we experienced a 7% decline on a reported basis, but we actually saw growth when looking at constant currency. This occurred despite the significant supply constraints we previously discussed, as well as the COVID restrictions that affected various regions in China, which impacted demand during the quarter. However, after the reopening that began in December, we observed a noticeable increase in store traffic compared to November, which translated into higher demand. While I won’t delve into January specifically, it is included in the guidance provided by Luca earlier. Nonetheless, we did notice a significant improvement from December to November.
Operator, Operator
Our next question is from Erik Woodring of Morgan Stanley.
Erik Woodring, Analyst
Maybe, Tim, the first question is for you. That 2 billion figure for the installed device base has increased by 200 million units year-over-year. This indicates the strongest annual addition of new devices in your installed base since you started sharing those data points. So, my two questions are: first, can you provide the iPhone installed base at year-end? And second, do you notice anything different or similar in this new group of users compared to past groups, in terms of demographics, regions, or monetization trends? I also have a follow-up.
Timothy Cook, CEO
The installed base has now surpassed 2 billion active devices. We set records in every geographic segment and major product category, indicating a widespread change. To clarify, it's increased by over 150 million year-over-year. Our last report indicated it was more than 1.85 billion, so now it stands at 150 million, which makes us very proud. We've also seen strong double-digit growth in several emerging markets, which is very significant for us, with India and Brazil as notable examples. Overall, the performance is very strong and promising for the future.
Erik Woodring, Analyst
And then, Luca, obviously, the December quarter was negatively impacted by the production challenges. Can you just maybe unpackage where channel inventory levels are today kind of across the iPhone broadly? And then what the data that you're seeing so far this quarter is telling you about iPhone demand deferral versus kind of iPhone demand destruction and perhaps pushing some upgrades later into the year rather than into the March quarter? And that's it for me.
Timothy Cook, CEO
Certainly. Regarding the channel inventory levels for the iPhone, we finished the December quarter below our target range due to supply challenges with the iPhone 14 Pro and iPhone 14 Pro Max. It’s worth noting that a year ago, we also ended the December quarter below our target inventory range because of similar supply difficulties, though they were not the same issue. In January, we've shared our thoughts based on Luca's information, but it's difficult to estimate how much demand we might recapture because it requires precise data that takes time to collect. We believe iPhone sales would have increased this quarter without the supply shortages. I hope this gives you some useful context.
Operator, Operator
Our next question comes from Aaron Rakers of Wells Fargo.
Aaron Rakers, Analyst
I have two as well, if I can. I guess the first kind of question, just going back on the gross margin line. Pretty good guidance into this March quarter. I'm curious if you unpack that a little bit specific around what you're seeing as far as maybe benefits from component pricing in the guidance, if you're embedding any of that at this point.
Luca Maestri, CFO
Yes, we try to account for every part of our cost structure in our guidance, with components being a significant factor. It's important to note that the negative impact from foreign exchange sequentially is 50 basis points, compared to 270 basis points from a year ago. The U.S. dollar has fluctuated quite a bit over the past 12 months, so we need to identify offsets to mitigate the negative effects of foreign exchange in order to provide accurate guidance. Components play a major role in that effort.
Aaron Rakers, Analyst
Yes. From a strategic standpoint, considering what we're observing among some of your competitors, I'm interested in hearing your thoughts, Tim, on the role of AI in your strategy, particularly within the Services segment. Do you see opportunities to enhance monetization within the paid subscriber base, and is AI something that you're looking to implement more strategically there?
Timothy Cook, CEO
Yes. It is a major focus of ours. It's incredible in terms of how it can enrich customers' lives. And you can look no further than some of the things that we announced in the fall with crash detection and fall detection or back a ways with ECG. I mean these things have literally saved people's lives. And so we see an enormous potential in this space to affect virtually everything we do. It's obviously a horizontal technology, not a vertical. And so it will affect every product and every service that we have.
Operator, Operator
Our next question comes from Amit Daryanani of Evercore.
Amit Daryanani, Analyst
I guess the first one I have is, Tim, I think based on your earlier comments that iPhones would have grown ex the production issue that implied that maybe it's a $7 billion or so impact that you had in December quarter from the production challenges on the high-end models. I'm sure it's tough to see what happens this time around. But I think historically, when you've had production issues or things like this happen, what has the consumer behavior being typically? Do they tend to go down towards the lower end models and get the phone they want quickly? Or do they just defer the production? Just from a historical perspective, I think do you typically recover what's deferred out or no?
Timothy Cook, CEO
It's very hard to estimate is the real answer because you have to know a lot of data, and it's usually only in hindsight that you have a more reasonable view of it. And so we put our best views in the color that Luca provided. That's kind of what I would say.
Amit Daryanani, Analyst
All right. And then I guess maybe if I think about Services as you go forward. I know you had really good growth in Services, I think, over the last several years. But as you go forward in Services, what do you think drives the growth more so? Is it the expansion of your installed base? Or is it more going to be driven by ARPU going higher for you? I'm just curious, how do you think about those 2 buckets as you go forward?
Luca Maestri, CFO
Amit, there are several factors to consider, and I've highlighted a few during the call. The first important aspect is the installed base, which serves as the driving force for Services growth. The fact that our installed base is expanding significantly, especially in many emerging markets, provides us with a larger potential customer pool, which is crucial. Additionally, we are noticing an increase in customer engagement within our ecosystem. Both transacting accounts and paid accounts have grown in double digits, indicating a positive outlook for the future. Many transacting accounts are transitioning to paid accounts over time. Another critical factor is our ongoing commitment to enhancing the reach and quality of our services. For instance, Apple Pay started primarily in the United States and has now expanded to 70 markets with millions of merchants. Our payment services consistently achieve new highs. Over the past few years, we have also launched new services that contribute to this growth. We are very optimistic, and the behavior of our installed base suggests strong potential for the continued growth of our Services business.
Operator, Operator
Our next question comes from Harsh Kumar of Piper Sandler.
Harsh Kumar, Analyst
Tim, I had a quick question on emerging markets. Seems like you're making a lot of strides in India. Potentially wanted to understand the kind of share you have in China and India. And relative to that, what would be your aspirational but sort of achievable share in iPhones in those territories, whether it's units or revenues? And I was hoping to draw on your experience and maybe what you've seen in other countries where you've had some longer presence.
Timothy Cook, CEO
Looking at the business in India, we achieved a quarterly revenue record and experienced strong year-over-year growth. We are pleased with our performance, especially considering the challenges we've faced. India is an exciting market for us and a major focus. We launched the online store there in 2020 and will soon introduce Apple retail. We are placing significant emphasis on this market. We’ve implemented various financing options and trade-ins to make our products more affordable and accessible. We are essentially applying the lessons we learned from scaling in China to our strategy in India. I don't have the specific market shares available, but I believe our market share grew worldwide last quarter despite the supply chain challenges we've encountered. I don't anticipate any differences between the two markets.
Harsh Kumar, Analyst
Understood. For my follow-up, I have an interesting theoretical question about pricing. If the CHIPS Act is passed and a lot of manufacturing occurs in the U.S. and other regions that might be more expensive than our current locations, has the company conducted any studies to assess the elasticity of demand in relation to small price increases for your products?
Timothy Cook, CEO
We have experience in that area, but I wouldn't necessarily reach the same conclusion regarding the product's cost. At this point, we don't know exactly what that will be, but we are fully committed to being the largest customer for TSMC in Arizona. I'm proud to be part of that effort.
Operator, Operator
Our next question comes from Wamsi Mohan of Bank of America.
Wamsi Mohan, Analyst
Tim, you've done a phenomenal job of driving consumer choice towards higher-end products within your portfolio. How would you compare this cycle for iPhones if you were to segment the Pro versus non-Pro models versus the cycles from the past few years? And do you think this move to higher ASPs is sustainable? Or do you think it reverses in a tighter consumer spending environment? And I have a follow-up.
Timothy Cook, CEO
The Pro models, specifically the 14 Pro and the 14 Pro Max, have performed exceptionally well until we encountered a supply shortage that prevented us from meeting the total demand. This indicates a very strong Pro cycle. There are several reasons for this success, but the most critical factor is the product itself. The innovations in our product are quite compelling, and we feel very confident about what we announced in September. We are pleased to now be in a position to fulfill the demand.
Wamsi Mohan, Analyst
And Tim, do you think that this move to sort of higher ASPs that has happened over the last few years is sustainable? Or could it sustain in this very tough macro environment that you've cited?
Timothy Cook, CEO
I wouldn’t want to predict, but I would say that the iPhone has become essential in people’s lives. It holds their contacts, health information, banking details, smart home connections, and many other aspects of their lives, including payments. Therefore, I think people are willing to stretch their budgets to purchase the best device they can afford in this category.
Wamsi Mohan, Analyst
Okay. Great. And Tim, you clearly emphasize the focus and importance of the installed base. If we think about the absolute grit of the installed base from 1 billion to 2 billion over 7 years from a device standpoint, how should we think about the penetration of services or the growth in paying customers on services or that time frame? Is that penetration rate increasing or decreasing? How fast is that growing relative to the growth of the overall installed base?
Luca Maestri, CFO
Wamsi, it's Luca. Yes, of course, we keep track of that. It's really important for us. Over the last 7 years, as we doubled the installed base, we've seen a growing engagement of our customers on the platform. That happens, first of all, by customers transacting on the platform and then moving to paid accounts. So starting to pay for some of the services. That percentage of paid accounts tends to grow over time. We've seen it in developed markets. We see it in emerging markets. And that is due to some of the reasons that I was explaining earlier, including the fact that we made it easier for our customers to get engaged on the platform. For example, we offer multiple payment methods in many countries. And we've made it easier to explore for more services because we've added a lot of services on the platform over the last 7 years. So to your question, of course, higher engagement means a higher percentage of paid accounts over time.
Operator, Operator
Our next question comes from Richard Kramer of Arete Research LLP.
Tejas Gala, Director of Investor Relations and Corporate Finance
Operator, can we move on to the next?
Operator, Operator
Next, we'll hear from Jim Suva of Citigroup.
James Suva, Analyst
Tim and Luca, you both mentioned India earlier in the Q&A. I'm curious if we are now facing even more opportunities as we move past COVID and navigate countries with varying COVID protocols. India has also been enhancing its high-speed transmission capabilities, and your market presence there is significantly underrepresented. It seems you are looking to diversify operational risks across the board rather than focusing on any specific country. With the potential for opening new stores, do you believe that this situation is now more favorable for opportunity than ever? Once you start establishing stores in India, could we see a significant surge in adoption? I would appreciate any additional insights you have regarding your perspective on India after overcoming the challenges of COVID and supply chain issues over the past two years.
Timothy Cook, CEO
Yes. Jim, we actually did fairly well through COVID in India. And I'm even more bullish now on the other side of it, or hopefully, on the other side of it. And that's the reason why we're investing there. We're bringing retail there and bringing the online store there and putting a significant amount of energy there. I'm very bullish on India.
James Suva, Analyst
And then as my quick follow-up, you had mentioned that Services, not necessarily specific to India, but Services overall were better than expected. And of course, supply chain was more challenged than expected. So what was the bridge factor of Services being better than expected on upside? Was it like advertising or apps or paid monthly subscriptions? Or what were kind of the things that really surprised you to the upside on Services?
Luca Maestri, CFO
It was Luca. The level of engagement we saw is reflected in the paid subscriptions. Our cloud services business, particularly in payment services, performed very well. Music showed strong results. We achieved several categories that set new all-time records, outperforming our initial expectations for the quarter. Tim highlighted in his remarks that when considering constant currency, our services grew in double digits, following a 24% increase last year. This indicates a very sustained growth trend.
Operator, Operator
Our next question will come from Krish Sankar of Cowen and Company.
Krish Sankar, Analyst
I have 2. The first one, Tim and Luca, you mentioned how the macro did soften, and it has an impact. And as consumers tighten their belt, when you look across your hardware products and service businesses, where are you seeing the biggest impact and where are you seeing the least impact from the softening macro? And then I had a quick follow-up.
Timothy Cook, CEO
We think there were some impact across the products and in Services. Probably, the ones that we saw the most impact on were Mac and Wearables. You can see that in those numbers. And probably, the least would have been iPhone.
Krish Sankar, Analyst
Got it. Got it. Very helpful, Tim. And then just a quick follow-up on the Mac. The PC industry is expecting a decline in PC shipments this year also. How do you think about the Mac relative to kind of like where the PC industry as a whole is expecting the shipments to end up? Is there any color you can give on that?
Timothy Cook, CEO
The industry is facing significant challenges and is contracting. I can't predict how this year will unfold, but in the long run, we operate in a sizable market where we currently have a low market share. We hold a competitive edge with Apple silicon. Strategically, we are well positioned in this market, although I anticipate some difficulties in the short term.
Tejas Gala, Director of Investor Relations and Corporate Finance
A replay of today's call will be available for 2 weeks on Apple Podcasts, as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 6541285, followed by the pound sign. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us.
Operator, Operator
And once again, this does conclude today's conference. We do appreciate your participation.